Rio Tinto, BHP shares are at risk as iron ore, copper prices sink

Rio Tinto (LON: RIO) and BHP (ASX: BHP) share prices have dropped sharply this year and the situation could worsen as iron ore sinks. In Australia, BHP shares have fallen for four consecutive weeks and were trading at A$39.73, down by 20% from the year-to-date high of $50.

Iron ore prices are sinking

Rio Tinto, BHP, Vale, and Fortesque Mining are some of the biggest mining companies in the world. BHP is the biggest firm in the industry with a market cap of over $134 billion while Rio Tinto is the third.

BHP and Rio Tinto focus on several metals but iron ore is their most important one. They both mine their ore in countries like Australia and sell most of them to China, the biggest consumer in the world.

Like other mining companies, they benefit when their core products are rising. This is not happening now that iron ore has continued falling. Data shows that the price of iron ore has crashed, raising concern that the longest commodity supercycle has ended.

Iron ore has dropped from the year-to-date high of $144 to a low of $96. It has also fallen by over 57% from the highest level in 2021. 

This trend could continue because, China, which has been consuming unlimited amounts of iron ore for years has had enough. That happened because the housing sector is yet to recover and analysts expect that it will take years to bounce back. Data released last week showed that the house price index continued falling in July.

In an opinion piece, Javier Blas, a Bloomberg columnist warned that China’s demand for iron ore, which is used to make steel, peaked between 2020 and 2024 as the country moved from construction and industrialization to the services sector. He wrote:

“During previous downturns, Beijing rescued its economy — and thus the iron ore and steel sectors — by indulging in a debt-fueled binge of construction. It’s unlikely that China will do so this time.”

Therefore, there is a big risk that Rio Tinto, BHP, and other companies that rely on iron ore will come under pressure. Besides, they have already started seeing a sharp decline in revenues.

BHP’s annual revenue in 2023 dropped to $53 billion from $65 billion a year earlier. Its profit also narrowed from $22.4 billion to $14 billion.

Rio Tinto also published weak financial results as its annual revenue moved from $55.5 billion to $54 billion and its adjusted EBITDA falling to $23 billion.

Mergers and acquisitions in focus

Iron ore is not the only metal giving Rio Tinto and BHP a headache. Clean energy metals like nickel, lithium, and cobalt, which they are betting on, have continued falling in the past few months as the electric vehicle industry slows. 

Worse, copper, a metal that is seen as a barometer for global economy, has also tumbled lately. It has dropped by almost 20% from the highest point this year. 

Therefore, these companies are looking for areas to grow their revenues. Earlier this year, BHP made a big bet on Anglo American, one of the biggest mining companies in the world. The plan was for Anglo American to split some of its South African assets and then BHP would focus on its vast assets.

Anglo American rejected the deal, arguing that it was too complex and that it undervalued its total valuation. 

Meanwhile, as we have written before, there are rumours that Rio Tinto is considering making a bid for Teck Resources, one of the most sought-after Canadian companies. 

Rio Tinto share price analysis

The weekly chart shows that the RIO stock price has formed an ascending channel pattern in the past few months. The lower side is the lowest swings since November 2021 while the upper side is the highest point since May of that year. It is now hovering near the lower side of this channel.

The stock has moved below the 50-week and 100-week moving averages. Therefore, at this stage, there is a risk that the stock will have a bearish breakout in the coming weeks. This view will be confirmed if it drops below the lower side of the channel. If this happens, it could drop to the next support at 3,433p, its lowest point in November 2021.

BHP stock price forecast

Meanwhile, the BHP share price peaked at A$49.55 earlier this year and has been in a steep downward trend since then. It has now retreated below the 50-week and 100-week moving averages. Most recently, it fell below the key support level at $39.84, its lowest swing in May 2023. 

This price was a notable one since it was along the neckline of the head and shoulders pattern, a popular bearish sign. Therefore, the path of the least resistance for the stock is bearish, with the key point to watch being at A$35, down by over 12% from the current level.