Materials ETFs in Focus on Rio Tinto's Record Iron Ore Q3 Output
Rio Tinto Plc (RIO) set a new record for the iron ore production in the third quarter. Production from the world’s second largest iron ore producer and exporter jumped 12% year over year and 5% quarter over quarter to 76.8 million tons thanks to the first full quarter of expansion in Pilbara mine in Western Australia.
With this, Rio Tinto continues to expect to produce 295 million tons of iron ore globally this year, up from 266 million tons last year. Global iron ore shipments came in at 78 million tons in the third quarter, up 15% from the year-ago quarter. Copper production also increased 1% year over year to 151,800 tons (read: Industrial Metals Recovery puts these ETFs in Focus).
Rio Tinto raised its copper production forecast from 585,000 tons to 615,000 tons for the full year on solid recovery at the Kennecott concentrator in Utah and sustained ramp-up of Oyu Tolgoi project in Mongolia.
Market Impact
The news of higher output has spread negative sentiments in the iron ore commodity market, as rising output will only add to the global supply glut of the steelmaking material and further weigh on the iron ore prices, which has already dropped 40% to a five-year low this year. This is especially true as steel consumption is also showing signs of waning due to the slowdown in the emerging and developing economies.
Additionally, the World Steel Association (:WSA) reduced the global steel usage outlook for this year and the next. The agency expects usage to grow by just 2% in both years, down from 3.1% and 3.3%, respectively. Weakening demand coupled with excessive supply will continue to weigh on the iron ore prices (read: 3 Industrial Metal ETFs to Buy Amid Weak Global Trends).
As a result, the shares of the Anglo Australian miner fell sharply by 3.8% in NYSE on Wednesday trading session but recovered slightly to down 1.3% at the close. Volume levels were also notable with shares more than two times trading hands than normal trading days. The sluggish trading of the stock has put downward pressure on the materials’ ETFs that are heavily invested in this mining giant.
This trend is likely to continue as Rio Tinto has a Zacks Rank #3 (Hold) and falls in a poor industry category, with a Zacks Industry Rank in the bottom 44%. Further, the stock has fallen 9.5% in the year-to-date time frame. This suggests that more pain is in store for the company and the related ETFs in the coming days.
Below, we have highlighted two ETFs with the highest allocation to Rio Tinto that are in focus following the company’s record Q3 iron ore production (see: all the Materials ETFs here).
Market Vectors Steel ETF (SLX)
The fund tracks the NYSE Arca Steel Index, holding 29 securities in its basket. Out of these, Rio Tinto takes the top spot with 13.72% share. The product primarily focuses on large caps as it accounts for more than half of the assets while mid and small caps take 26% and 217%, respectively.
In terms of country allocation, America dominates the fund’s return at 36.1%, followed by Brazil (22.1%) and United Kingdom (13.7%). The ETF has amassed $95.1 million in its asset base while trades in a lower volume of roughly 40,000 shares a day. The product charges 55 bps in fees and expenses from investors and has plunged 15% in the year-to-date time frame.
First Trust ISE Global Copper Index Fund (CU)
This product provides global exposure to the copper mining industry, such as copper mining, refining or exploration, by tracking the ISE Global Copper Index. In total, the fund holds 23 stocks with RIO as a top holding at 8.39%. The ETF is invested across all market spectrum with 47% going to large caps, 31% to small caps and the rest to mid caps (read: With China Rising, Are Copper ETFs Back on Track?).
Here, Canadian firms take the top spot with one-thirds of the portfolio while United Kingdom and U.S. round off the top three with double-digit exposure. CU has managed $235 million in its asset base and charges 71 bps in fees per year from investors. Volume is paltry at about 11,000 shares. The fund has lost 9.7% so far in the year.
Bottom Line
While the above-mentioned products have performed badly from a year-to-date look and this trend is likely to continue given the continued oversupply of the steel making product, investors should note that these funds can easily counter shocks from a specific corner of the space or some of the industry’s biggest components based on their diversity.
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