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Rio Tinto Group SWOT & PESTLE Analysis

Last Updated : 11 May, 2017

OVERVIEW

Name of the Company: Rio Tinto Group

Business Sector: Metals and Mining

Operating Geography: Europe, Australia, United Kingdom, Global

About the Company: Rio Tinto Group is a British-Australian MNC in the field of metals and mining with primary focus on extraction though they also own refining subsidiaries. It is listed on both the London Stock Exchange (FTSE 100 Index) as well as the Australian Securities Exchange (S&P/ASX 200 Index). Half of the global assets of the company are housed in the Australian continent with headquarters in Melbourne and offices in Perth and Brisbane. It specializes in production of iron ore, bauxite, coal, alumina, aluminium, uranium, diamonds and salt in Australia.

Revenue: US$ 34.829 billion (2015)

SWOT & PESTLE Analysis

The SWOT Anaysis for Rio Tinto Group is given below:
Strengths
Weaknesses
1. Global leader: third biggest miner in the world
2. Second largest producer of iron ores.
3. Has access to world-class and efficient technology.
4. Instrumental in forming MMSD study to research on the CSR side of mining,
5. Full exploitation of economies of scale to counter the low pricing environment
6. Highly diversified company leading to lower strategic risks.
7. High investment in CSR activities
8. Has ownership hard-to-replicate, rare resource bases in Australia.

1. Poor mining practices in indigenous Australian communities.
2. Poor human rights’ record of the company leading to criticism.
3. High long term debt
4. Commodity wise revenue generation not uniform.
Opportunities
Threats
1. Aluminium’s demand is slated to rise in future as a substitute to other metals.
2. Increase in Infrastructure spending can lead to higher demands and opportunities for expansion.
3. Revenues from diamonds and minerals sector fore casted to rise steadily
4. Divestment and lowering capital expenditures can decrease long term debt.
5. Increase in iron ore shipments due to expansion in the Pilbara region.
1. Fluctuating demands for iron ore in future
2. Weakness in demand for coal with falling prices.
3. China’s stagnating growth in 2014-15 will put a pressure on prices of major metals.
4. The perception that mining industry is incompatible with sustainable practices.
5. ACF’s proposal to implement a statutory Corporate Code of Conduct in Australia
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Strengths

1. Global Leader - Third biggest miner in the world: Rio Tinto became the world’s third biggest mining corporation by earning gross revenues of approximately $54.6bn in 2013. It is topped by the two giants Glencore Xtrata and BHP Billiton.

2. Second largest producer of iron ores: Rio Tinto is the second largest producer of iron ore in the world. The iron ore sector contributes around 38% of the revenues of the company. Hamersley in Australia(operated by Rio Tinto) is among the top ten largest iron ore mines in the world.

3. Has world class and efficient technology: Industry-leader smelting technology for aluminum smelting; world class technology for copper extraction; technologies to reduce emissions from products and processes.

4. Instrumental in forming MMSD study to research on the CSR side of mining: Rio Tinto was the first to suggest a study on the sustainability in the mining industry through the International Institute for Environment and Development in Australia which was later on named as the Mining, Minerals, and Sustainable Development Study.

5. Full exploitation of economies of scale to counter the low pricing environment: Rio Tinto is banking on its realized economies of scale to counter against the subdued iron ore pricing environment.

6. Highly diversified company hence leading to low strategic risks: Diversified product portfolio and investment portfolio has made Rio Tinto as the best bet among the Mining Big 3 companies.

7. High investment in CSR activities: One of the key performance indicators for the company is the AIFR (All Injury Frequency Rate). The AIFR for the group has declined to 0.65 with a decline of 20% over last 5 years. This is driven by the Zero Harm Programmes of the company. It has also funded WWF, Australia from time-to-time. In 2013, Rio Tinto group contributed to approx. 2,200 socioeconomic programmes spending US$331Mn.

8. Ownership of hard to replicate, rare resource based in Australia:

a. Large and unique resource base of premium quality coking coal in Australia.

b. Operates two of the largest uranium producing mines in the world – Ranger, Australia and Rossing, Namibia.

c. Operates one of the largest diamond mines, Argyle.

Weaknesses

1. Poor Mining practices: Poor Mining practices often led to cultural damage, drug and alcohol abuse, HIV/AIDS, forced resettlement, violence etc which broke the traditional bonds within the indigenous communities.

2. Poor human rights record leading to criticism of the company: HR practices of Rio Tinto group are not very employee-friendly. For example, the policy of signing individual workers in coal mines takes away their power of collective bargaining and leads to union members joining hands with NGOs to protest against the functioning of the company.

3. High long term debt: In 2014, the net debt of the company stood at US$ 12,495Mn.

4. Commodity wise revenue generation not uniform: As we have already seen, the group depends a lot on the iron ore division for almost one-third of its revenues. As a result it has increased shipments basing the Pilbara expansion. If this backfires, the entire group will be in for a huge loss.

Opportunities

1. Aliminium's demand is slated to rise in future as a substitute to other metals: Aluminium is lightweight and hence can be used in cars to reduce weight and emissions; durable and hence finds its used in construction sector; malleable and ductile and hence its demand in the packaging industry. Forecast-ed increase in shipments from the current 4.12 million tonnes to 4.69 million tonnes in 2021.

2. Increase in infrastructure spending can lead to higher demands and opportunities for expansion: In developed economies, infrastructure spending is one of the few levers left to support growth at a time when it is stagnant with high unemployment and low borrowing costs. Similarly, in developing and emerging economies, the poor infrastructure acts as a bottleneck in the economic cycle. Thus, this is the right time for increased infrastructure spending.

3. Revenues from diamonds and minerals sector predicted to rise steadily: The Trefis forecast shows that revenues from diamond and minerals sector will rise from $4.27B.

4. Disinvestment and lowering capital expenditures can decrease long term debts: One of the major focuses of the company strategic report was to strengthen its balance sheet which it aims to do by lowering capital expenditures and divestment. Furthermore, its strategic move to expand Pilbara operations at a $3Bn lower capital cost displayed the improved capital allocation practices of the company.

5. Increase in Iron Ore shipments due to expansion in the Pilbara region: Rio Tinto’s iron ore shipments are slated to rise exponentially till early 2017, when the Pilbara operations will have been successfully established with a production to the tune of 350 million tonnes a year.

Threats

1. Fluctuating demands for iron Ore in future: China is the world’s largest consumer of iron ore. This iron ore is primarily used to manufacture steel. However China’s growth in iron ore demand is falling from 6.1% in ’13 to 2.7% in 2015. This will certainly put pressure on the prices as the rate of supply will supersede the rate of demand (The surplus of iron ore supply is forecasted to hit a whopping 300Mn tonnes in 2017).

2. Weakness in demand for coal with falling prices: Similar to the last point the demand for coal is also slated for a decline following China’s stagnant growth over these years, since China accounts for 40% of world’s copper consumption.

3. China's stagnating growth in 2014- 2015 will put a pressure on prices of major metals: China is slowly shifting from an investment-led growth model to a consumption-led growth model. Its GDP is expected to decline to 7.1% in 2015 from 7.7% in 2013. China, being a major hub of the company’s various shipments will affect the demand and prices drastically.

4. The perception that mining industry is incompatible with sustainable practices: There is a general perception among the populace that the mining industry is synonymous with bad HR practices and non-sustainable practices. As long as this perception is not challenged, the various CSR activities of the company will be to no avail.

5. ACF'S proposal to implement a statutory corporate code of conduct in Australia: The ACF has worked with several NGOs to implement a statutory corporate code of conduct which would monitor and evaluate the operations of the foreign companies and impose a set of regulations. This will hinder the nature of operations of Rio Tinto.

Rio Tinto SWOT analysis has been conducted and reviewed by senior analysts from Barakaat Consulting.

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The PESTLE Anaysis for Rio Tinto Group will be provided soon.
Political
Economical
Social
Technological
Legal
Environmental
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