Rio Tinto Profits Drop 59% (Article by Henry Brennan on 09.02.2012)

9 Feb

 9 February 2012 | By Henry Brennan

 Mining companies continue to be visibly shaken by volatile commodity markets as Rio Tinto becomes the latest to post a fall-off in profitability.

The group has revealed today that net earnings of $5.8 billion (£3.7 billion) for 2011 amounts to a 59% fall in annual profits. This loss is primarily attributed to an impairment charge of $8.9 billion related to its aluminium businesses.

Rio Tinto is a top holding for BlackRock’s £7.7 billion BlackRock Global Funds World Mining Fund*, Axa Framlington’s £346.9m Managed Balanced Fund * and Fidelity’s £441.0m UK Growth Fund*.

Aluminium prices rose from $2,450 at the start of 2011 to $2,800 by late April. The adverse economic climate caused prices to fall below $2,000 by the end of 2011.

According to Rio Tinto, the sovereign debt crisis, combined with an economic slowdown in China, led to a difficult year for commodity traders.

“Despite the average price strength, commodity prices deteriorated during the second half of the year and almost all finished the year lower than they started,” it reports.

“This was largely a result of the ongoing macroeconomic uncertainty associated with the sovereign debt crisis in Europe, the concern for broader contagion and financial system stability and the tightening of credit in China.”

Mining giant BHP Billiton delivered a similar assessment of a bleak economic environment yesterday after it revealed a 5.5% decline in profits for the six months ending December 31.

While BHP Billiton identified two major “bright spots” in the form of the US and Japan, Rio Tinto is more cautious on the outlook for both markets.

“In this environment, another round of quantitative easing or other unconventional monetary policy cannot be ruled out,” the latter reports, warning of the threat of contagion from Europe and constraints on strong growth.

Japan’s economy may equally find itself curbed by the sovereign debt crisis, while the group remains optimistic on the prospect of both India and China returning to previously high levels of growth.

*As at December 31, 2011, according to FE Analytics

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