Economic Analysis of Rio Tinto Limited: A Case Study

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Economics for Business
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Executive summary
The report aims at determining the current capabilities of the company, and an attempt has
been to understand the goals of the company and the hence the eventual formulation and
implementation of various policies to achieve those goals and the status of the company in
the period of 5 years from now. For this assignment, a company from the mining industry has
been chosen such that the industry background has been discussed and effort has been
made to analyse the industry performance and its contribution to GDP as a whole. A
company, Tinto Rio Limited has been chosen within the industry to understand the forces of
market supply and demand influenced by the prices of the products and services and also to
determine the elasticity of such demand in response to the price change. Also, a real-life
incident has been discussed in the assignment to gain an in-depth knowledge of the subject
matter.
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Table of Contents
Introduction...............................................................................................................................................4
Introduction to company.........................................................................................................................5
Overview of the industry.........................................................................................................................6
The market structure of the industry....................................................................................................7
Factors that influence demand for the company’s product(s)..........................................................8
Factors that influence the supply of the company’s product(s).....................................................10
Elasticity..................................................................................................................................................11
Impacts of an event on the industry/company..................................................................................13
Conclusion..............................................................................................................................................14
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Introduction
A company's price is determined by the market forces of demand and supply, such that the
responsiveness of demand to the price change is determined by the demand elasticity of the
product or service. Such elasticity factor varies from industry to industry, and hence the
responsiveness of demand to the price change is significantly different in different industries.
Such analysis helps the management to ascertain and implement an appropriate pricing
policy enabling them to gain a competitive advantage over its competitors in the same
industry. This also helps the company to formulate and implement long term strategies and
policies for achieving its goals and objectivities.
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Introduction to the company
Rio Tinto Limited is an Australian based world's largest mining industry. It is a multinational
corporation having its operations in different parts of the world such that it is mainly involved
in the materials aspect such as extraction of minerals and metals. It also has an established
business in the refinery operations consisting of bauxite and iron ore. It was founded in 1873
under the presidency of Hugh Matherson with its headquarters being in Melbourne. Over the
years the company has expanded its business around the globe covering all the six
continents and has set up its second headquarters in London. So, it is a dual listed company,
trading on both Australian and London stock exchange markets. Company has had a history
of strong financial health such that it has always commanded dominance over the market,
holding the top spot consistently over the years. Share prices have been rising over the years
such that the company is earning an impressive P/E ratio of 9.370. Company has been
paying the yearly payment of dividends, achieving the annual dividend yield is 4%.
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Overview of the industry
Mining and metals industry in Australia has been one of the eldest and established industries
in the country such that it accounts for 7% of total GDP and is considered to be the major
contributor to Australia's GDP. The said industry is majorly export-oriented is accounted for
50-60% of the total national exports since 2003. Mining Industry consists of various activities
such as minerals extractions to refinery operations of iron ores and, which makes Australia
the 5th largest producer of gold, iron ore, zinc etc. This industry has experienced a surge in
growth majorly in the time period of 2005-2013, as there were a major investment and
expansion plans directed towards the industry from the government authorities and private
corporations as well. In this period, the focus was to strengthen the export and the commodity
market of the industry, enabling Australia to make its reach far around the globe. As per the
recent study, there are 370 mining sites around Australia and its highest traded commodity
mineral being traded is iron ore accounting for a share of 29% in the global availability of the
iron ore.
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The market structure of the industry
A market structure is a functional structure and the organisational distinctions within an
industry which helps in understating the key elements and components of the industry. It
defines the interrelationship between different components in the industry such that they
interact with each other. The major components of market structures being a number of firms:
 Number of firms
 Nature of market (Perfect Competition, Oligopoly etc.)
 Product Differentiation
 Costs involved
 Customers’ spending capacity
 Integration of market
A mining industry operates in the market conditions of the Oligopoly. Oligopoly is the market
condition where there are few manufacturers, and the concentration of the market
capitalisation lies in few hands. Each firm keeps a close eye on the production and pricing
strategies of the other such that they closely monitor any changes implemented in the policies
of the of others and hence counter the changes by implementing the same in their own
policies.
Rio Tinto Limited is a part of the mining industry of the Australian Economy and is considered
to be one of the major players in the economy. Others major players being BHP Billiton
Limited, Fortescue Metal groups, Newcrest Mining etc. In the industry, 41% of the revenue is
generated through gold mining, such that major transactions are carried out in this area. The
2nd most traded and extracted mineral is the coal and thus is mined extensively. The majority
of the extracted minerals and metals are exported to the international markets, making it the
largest exporter of the gold, zinc, bauxite etc. The export value is much more significant than
the export value.
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Factors that influence demand for the company’s product(s)
Determinants of demand
A mining industry’s products and services consist of different minerals and metals, minerals
commodities and other refinery operations relating to iron ore. A demand for a product is
ascertained and determined by various market factors, which may or may not be under the
control of the company. Such factors' degree of influence depends and varies on the industry
to industry. 2 such major factors being:
Price of the product: The price of the product is the major determinant of the demand for the
product. Prices are set according to several internal and external factors such that each factor
plays its part in their respective manner. Internal factors such as cost structure, economies of
scale etc. are within the control of the company and hence can be influenced and rectified by
management interventions and policies. External factors such as inflation and increasing cost
of living tend to affect the prices of the products as well and are mostly out of the control of
the company. Such a decrease in the price leads to an increase in demand provided other
factors remaining constant and vice versa.
Related products: Related products can be defined as products which directly or indirectly
the demand and prices of the products of the own company. Related goods may be classified
as:
 Complementary goods: These goods are used together with their own products and
hence their demand moves proportionally with their own product's demands. Their
demands decrease as the price of the other products increase and vice versa. E.g.
Sugar and Coffee etc.
 Substitute goods: These goods are an alternative to the existing goods and hence are
negatively proportional to them. Their demands increase as the price of the other
products increase and vice versa. E.g. Coffee and tea etc.
Related products' demands vary directly or indirectly with the existing products' demands and
hence play a major role in the demand of the existing project.
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Factors that influence the supply of the company’s product(s)
Determinants of supply
Supply of the product is directly proportionally to the price of the goods such that as the
supply of the product increases, the price of the product will increase. The manufacturer of
the company tends to increase the price of the company as the supply of the product
increases, as the supplier will be able to sell more product at higher prices and hence
increase their profits significantly. Supply is majorly dependent on external factors such as:
Technology: Technology plays a vital role in the supply of the goods, as new and improved
technology will help to increase the production capacity of the company and hence will lead to
an increase in overall output. Technology helps in the organisational functions of the company
and hence leads to improve in the inefficiency of the operations.
Taxes and Subsidies: Such impositions and benefits by the Government authorities help
them to regulate the market forces of demand and supply. To curb the supply of the products,
the government will increase the tax rates and take away subsidies provided to the company
and vice versa. Such factors are out of the control of the company and should be considered
while formulating and implementing the pricing policies of the company.
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Elasticity
The company Rio Tinto Limited operates in the mining industry is considered as one of the
major players in the said industry. The mining industry is involved in various minerals
extractions and refinery operations on different levels. It is solely responsible for the
production and making availability necessary metals and other resources to the rest of the
industry and sectors operating in the industry. This makes apparent that demand elasticity of
the product is highly inelastic, such that the demand shows less responsiveness to the price
change of the product and the services provided by the company. The end products of the
industry are used both in daily activities as well as in heavy-duty industries. Businesses from
various sectors and industry tend to rely on the products generated from this industry, and it
used at all levels of the organisation. The low levels of the organisation, such as operations
and administration level, require the use of metals and other resources in daily activities. E.g.
use of machinery in the factories, other equipment both in factories and offices.
It has been concluded from the above paragraph, that the products are highly inelastic in
nature and show very little responsiveness to the price change. Still, it shows a change in
demand in the following cases:
The 1st thing would be the price change, such that the increase in the price of the product may
make the product less attractive to the customers and other companies' more attractive to
them. On the availability of the substitutes, customers may tend to move to other products. In
the case where the competitors increase or decrease their prices, it may lead to a shift in the
demand of Rio Tinto Limited. Although the shift might not be that of a big one,
increase/decrease in their prices will certainly affect the demand of Rio Tinto Limited
The 2nd thing which needs to be considered is the availability of the substitute goods, which
increases the demand elasticity of the product and makes the demand more responsive to the
price change. Rio Tinto Limited operates in an oligopoly market such that market
capitalisation is accumulated among a few large corporations and hence, changes in price
policy tend to affect the demand for the other companies as well. All the companies need to
monitor and assess the policies and performance of each other to not lose out on competitive
advantage and thus pricing policies, in general, resemble that of each others’.
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