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Rio Tinto's downside risk

Rio and BHP released their production reports over the last 2 days. Both were solid enough but neither has been good enough to withstand general selling of mining stocks over the past 2 days. In Rio's case, this has seen it reject a significant chart resistance area that could easily see it headed back to support below current levels.

Rio's second quarter iron ore production narrowly missed expectations. However, it has maintained its guidance to ship 350m tonnes on a global basis this year. It will only need relatively minor productivity gains and some ramp up in production to achieve this. Full year guidance on its other major commodities was unchanged.

The overall picture for both Rio and BHP is one of grafting out cost improvements and relatively minor volume gains while keeping capital expenditure controlled

Against this background, the market appears to be wondering if this is about as good as it gets for iron ore stocks for a while. China’s steel production has actually increased in recent months but there are questions over how sustainable this is against a background of soft global demand. At the same time, the Roy Hill project will add to iron ore supplies over coming months and Vale’s big new Brazilian project is scheduled to begin production around the end of the year.

The Rio chart broke below the support of a minor double top formation yesterday. The significance of this double top is enhanced by the fact that it occured at the 78.6% Fibonacci retracement level. It would not surprise to see this turning point follow through to a move back into the support zone between $42.50 and $46.25. 

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