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Does Rio's iron ore boost signal a turn for commodities?

Anglo-Australian miner Rio Tinto posted Friday a 17 percent rise in third-quarter iron ore shipments, selling more of the raw material than they were able produce, a result that some investors are taking as a sign that conditions for the commodity market might be looking up.

The group said it was on track to hit its full-year target of 340 million tons, upping output by some 12 percent despite the fears of slowing Chinese growth that have dogged markets and commodity prices all summer.

"When I looked at iron ore, it was very strong, very solid. I looked at the nine-month numbers and I was encouraged, these are the sort of numbers I like to see," chief investment officer at Ayers Alliance Securities, Jonathan Barrett said.

"I get a good sense that that commodity cycle is starting to change and we are in fact getting a base in play from which we can start to climb.

"Once the commodity turns from a buyers' market to a sellers' market you'll find stocks like Rio will certainly be under a lot of demand."

Iron ore prices have tanked some 60 percent in the year as growth in China's steel industry continues to slow, hurting mining firms and their profit margins.

But the miner said it shipped 91.3 million ton in the last quarter, outstripping production of 86.1 million tonnes, according to its quarterly production report, showing demand for iron ore is showing no signs of slowing.

"The Chinese demand picture has actually improved over the quarter, where they sold more iron ore raw product then they actually produced, which is actually quite a positive indicator," Kieron Hodgson, commodity and mining analyst at Panmure Gordon told CNBC.

"From an investment perspective, you have to insist on the lowest cost producers to continue. It is the highest cost names that have to continue," he said.

Iron ore being transported in Western Australia
John W Banagan | Photographer's Choice | Getty Images
Iron ore being transported in Western Australia

Iron ore stood at $53.20 per ton on Friday, just above the $50 average over 2016 and 2017, according to a median forecast of 17 analysts polled by Reuters late last month.

Analysts say even with the sharp fall in commodity prices, Rio Tinto was in a strong position to sustain its high production levels, as its cost of extracting the product are so low.

"Rio Tinto cash costs per ton are less than $20. Consider the current spot price of $50, there is still an awful lot of margin in that business. Iron ore is the backbone of the business and the highest producer of profits and revenue," Hodgson said.

Analysts at Investec said that criticisms of Rio's tactics of flooding the market did not stand up, given the margins the group is bringing in on the commodity.

"We take comfort from the fact that it does respond to market conditions where it needs to, cutting back on production of slag and diamonds, for example," the broker said in a note to clients published on Friday.

Shares in Rio Tinto traded flat to higher on Friday after the company's results, but down over 16 percent so far this year as commodity prices have tumbled.

By contrast, fellow commodity trader and mining group Glencore has tumbled 60 percent so far this year, on fears that its debt pile may be unsustainable.

"The new strategy is a dramatic positive change for Rio Tinto and management are delivering on their promises. We expect the stock to re-rate in 2015 and into 2016 as commodity markets rebalance. But believe Rio Tinto is undervalued on most metrics, and we rate the stock a buy," analysts at Deutsche Bank led by Rob Clifford said in a note published after Rio's results.