Royal Bank of Canada's capital markets division has recently downgraded its rating for mining giant Rio Tinto PLC (ASX: RIO) from "sector perform" to the equivalent of a "sell" rating. This move is based on the increasing pressure from a global iron ore supply glut, with expectations that prices will continue to trend lower for several years.
Iron Ore Prices Face Structural Downturn
Analysts at RBC noted that while iron ore prices are currently holding above $100 per tonne, the price benchmark is expected to gradually decline as supply continues to increase. Fitch Ratings recently revised its 2026 iron ore price forecast upward from a previous $90 to $95 per tonne. However, it indicated that the current price level exceeding $100 per tonne is unsustainable. Prices are anticipated to gradually retreat as supply grows and inventories at Chinese ports accumulate. Fitch's medium-term projections suggest the price will drop to $85 per tonne in 2027 and further to $80 per tonne in 2028, with a long-term equilibrium price around $75 per tonne.
Morningstar also shares the view that Rio Tinto shares are currently trading at a premium of approximately 18% above their fair value estimate. The firm's analysis assumes an average iron ore price of about $100 per tonne from 2026 to 2028, but notes that the long-term marginal cost of production is only $75, indicating a significant overvaluation at current price levels.
Supply Surplus Trend Appears Difficult to Reverse
The global iron ore market is confronting dual pressures on the supply side. On one hand, major miners in Australia and Brazil continue to ship volumes steadily. In 2025, total shipments from Australia, Brazil, and South Africa reached a record 1.396 billion tonnes, representing a year-on-year increase of 2.2%. On the other hand, the Simandou project in Guinea dispatched its first shipment in January 2026 and is expected to contribute approximately 20 million tonnes of new supply for the full year.
Morgan Stanley forecasts that the global iron ore market will enter a surplus state in 2026, placing moderate downward pressure on prices, with a potential bottom around $95 per tonne in the third quarter.
Rio Tinto's Fundamentals Remain Resilient
Despite facing price downside risks, Rio Tinto's operational performance remains robust. In the fourth quarter of 2025, both its iron ore and copper production exceeded market expectations. For the full year, the company shipped 326.2 million tonnes of iron ore from the Pilbara region, at the lower end of its guidance range. The company's production target for the Pilbara region in 2026 is set between 323 and 338 million tonnes.
RBC's rating adjustment does not reflect a negative view of Rio Tinto's asset quality but is instead based on an assessment of the commodity cycle. As a producer positioned in the second quartile of the global cost curve, Rio Tinto is expected to remain profitable even during an industry downturn. However, current valuations appear overly optimistic regarding future iron ore prices. Investors should be cautious of the risk that earnings could come under pressure in the coming years as prices revert to lower levels.
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