Metal traders suggest that sustained speculative selling by hedge fund operators is the mystery factor driving metal prices down. If this theory is correct, it makes no sense for speculators to force producers out of business, and every sense for them to switch sides and drive prices sharply higher once the turning point has been reached.
In the meantime Rio Tinto is a natural hedge because large chunks of its cost base are in weak currencies like the Australian dollar, the Canadian dollar and the rand, which gives Rio Tinto a natural hedge and added back $124m (pounds 74m) to profits. Take in another $107m (pounds 64m) worth of cost savings, a modest rise in volume, and margins on sales were actually little changed at 23 per cent. Turnover fell 5 per cent and pre-tax profits were only 8 per cent lower at $942m (pounds 560m). Earnings increased in four of the six divisions, industrial minerals, iron ore, aluminium and energy, while copper and gold were the only two which failed to shine.
The shares shed another 22p to 600p yesterday. But analysts are still expecting profits of pounds 900m in the full year, rising to pounds 1.03bn and earnings of 60p a share in 1999. Size and diversity give Rio Tinto an extra resilience, and at just 10 times prospective earnings in 1999 only a meltdown would stop them looking cheap.