Rio Tinto share price faces substantial risks in this new normal

Rio Tinto (LON: RIO) share price has been in a deep sell-off in the past few months as concerns about China and its dividends rose. The stock plunged to a low of 4,508p on Monday, the lowest level since November last year. It has fallen by more than 22% from the year-to-date high.

Dividends and China risks

Mining stocks are facing substantial headwinds as its biggest market goes through a historical slowdown. Recent economic numbers showed that China’s retail sales, industrial production, and fixed asset investments are slowing.

As I wrote here, the Chinese economy is being affected by 4 important Ds: debt, demand, decoupling, and demographics. Internal and external demand has dropped sharply, leading to lower imports and exports.

At the same time, real estate companies like Evergrande and Country Garden are collapsing. China’s investments in large infrastructure is also slowing. This means that demand for commodities will remain low for a while since China is the biggest consumer.

The new normal will be painful for Rio Tinto and other mining companies. For example, BHP Group decided to slash its dividend after its half-year revenue and profitability dropped by double digits. Rio Tinto also slashed its dividend in July.

Dividends are an important part of mining stocks. Unlike growth companies like Nvidia and Tesla, investors buy these companies for their dividends. Therefore, a cut means that retirees and income investors will receive less money.

Dividend cuts are not necessarily bad since companies often boost them when conditions improve. The challenge for Rio Tinto and other mining companies is that China’s economic recovery will not improve any time soon. In the past stimulus policies by Beijing have helped to support the economy. Recent stimulus package has been a bit mild.

Therefore, I suspect that the new normal for Rio Tinto will mean slow revenue and profitability growth. This will translate to lower dividend payouts to investors.

Rio Tinto share price forecast

The daily chart shows that the RIO stock price has been in a strong bearish trend in the past few months. It dropped from the year-to-date high of 6,033p and settled to a low of 4,508p on Monday. The shares have moved below the 50-day moving average and are between the 50% and 61.8% Fibonacci Retracement levels.

Rio Tinto stock has also formed a M pattern. Therefore, I believe that the shares will likely continue falling, with the next level to watch being at 4,194p, the 78.2% retracement level.

The post Rio Tinto share price faces substantial risks in this new normal appeared first on Invezz.