Tea leaves reading on RIO...
by, 16th-July-2009 at 12:42 PM (4855 Views)
I know I am sounding like a Rio knocker here in this post but never mind, I'd rather speak my mind and feeling sorry later than not speaking at all. If you are an existing RIO investor, you should take note.
1) According to news, RIO, of the big three has been the most vigorous iron ore player in the Chinese market. It has the most extensive sales network among the three and it has been taking a marketing and sales approach of market penetration than profit optimising comparing with the other two. Rio has been extremely successful with this strategy in China to date, mainly due to the good work done by Stern Hu and his team. But ever since the "Spygate" incident and with Stern and his team arrested, there has been a sea change in the Chinese iron ore market, according to those who are working in the industry and as usual "anonymous" speakers...
2) They said, the Rio sales network is now in complete shutdown or in ruin, which, in the Chinese market, especially among the small to medium size steel mills is the most important sales channel. Without this network, Rio sales will be greatly impacted. To make matter worse, because of the serious implication of spygate and its potential fallout, in terms of punishment to the "locals", not many steel mills are willing to deal with Rio for fear of being link to the matter. In fact they are saying right now no one is ordering any new stuffs and they are living on their current stockpile, adopting a wait and see attitude. There is extreme fear in the market and everyone is keeping their head low...
Because of spygate, the implication from here would mean life will be extremely difficult for Rio even after the spygate is all settled or buried because the steel mills are worried, if not, fearful of the implication of doing business with Rio and the implication of their state loyalty - which brings up the question on Rio's future - will they do well without the Chinese market?
3) The current business as usual claim by both Rio and BHP, according to these people, the business is mainly about the existing or "old" contract fulfilment. Once these contracts are cleared and comes time to negotiate new ones, it will be a totally new ball game with a different set of time frame and model and possibly vast rule changes. So, it is not a good idea to assume the same old same old will proceed as usual because the next round of talk will be "unprecedented" and outcome at best is completely uncertain, subjecting to many variables, which translated would mean RISK.
There is another element of risk being introduced by the merger of production between Rio/BHP as there is no telling how the Chinese will play their "anti-monopolistic" laws. Many are saying it is a toothless tiger but unless Rio/BHP are willing to gamble on the Chinese market, they should take that more seriously.
4) Here're some numbers - in 2008, the total iron ore sales for Rio in China is 83.38 million tons, representing an 18% growth, constituting 53% of total production. Also in that year, Rio's iron sales had exceeded their copper sales in China, making their iron ore business to be the most profitable unit... question: will the spygate expand to Rio's copper market practices?
5) Now you can take all these with a pinch of salt and ignore their credibility, or you can consider all these are just parts of the fog of war - market disinformation and misinformation - as part and parcel of the game ... but there is one thing you can do to protect your self interest as a Rio investor - watch Rio's share price movement closely. I would describe two possible scenarios you should pay attention to:
5.1) if and when you see a sudden big % plunge in Rio's stock price - that's a sign that big investors are exiting the stock; or
5.2) you begin to see a series of small price decline, a consistent but concerted selling through program selling
Those are the signals you should take heed.
Ok, I am done. Good luck to you lucky Rio investors. Don't say you have not been warned.
Good news week for Rio