Rio Tinto has defended increasing iron ore production even as prices plunge, arguing that being a low-cost miner allows it to thrive in the face of continued market volatility which is causing smaller players “significant distress”.
Chief executive Sam Walsh told shareholders in London he expected “continued bumps before the market settles” but Rio was well placed to deal with the volatility given it had a robust balance sheet.
“I know there’s a lot of controversy, I know that there’s a lot of late entries into the market who have taken advantage of higher prices and they’re now feeling the impact of that as prices have come down,” Walsh said at the company’s annual general meeting on Thursday.
“This is rational, normal economics. It’s what typically happens across a range of commodities, not just iron ore.”
Andrew Forrest, the billionaire chairman of mining company Fortescue Metals Group, caused controversy when he suggested that producers should cap production in order to stabilise prices which have fallen from US$130 a tonne 18 months ago to around $50.
His company has seen margins squeezed by the price fall. The company says its break-even price is US$39 a tonne.
Another higher cost producer, Atlas Iron, has already mothballed its mines and BC Iron has warned that it might have to do the same.
Rio’s figures for last year illustrate the problem. it produced 234m tonnes of iron ore in 2014 - up 12% on 2013.
The company’s production cost in 2014 averaged $US19.50 a tonne. But factoring in the current exchange rate for the Australian dollar, and lower oil and gas prices, Rio’s iron ore costs are now running closer to $US17.
Ratings agency Standard and Poor’s has put eight of the world’s largest iron ore producers - including Rio and BHP Billiton - on negative watch following the steady plunge in prices.
The Australian federal budget could suffer a $30bn revenue writedown over the next four years because of the iron ore price drop and treasurer Joe Hockey is contemplating a fall to $US35 a tonne.
But Walsh was confident that continued growth in China – even though it has slowed – will save the day in the long run.
“It should be remembered that growth of just 1% per year is required for China to reach 1bn tonnes of crude steel production by 2030,” he said.
Walsh, an Australian, said that with iron ore now worth $US50 per tonne delivered into China the company had to maintain the margin between itself and high-cost producers.
“Being the lowest-cost producer is not about a competition or a bid to secure bragging rights,” he said. “It’s fundamental to the health of our business.”
High-cost iron ore supply was being supplanted globally by low-cost production, he said. “Major industry shifts of this nature never take place in a smooth and uniform manner, so we can expect continued bumps before the market settles.”
BNP chief Asia economist Richard Iley argued this week that despite producers’ optimistic forecasts the outlook for Chinese demand is skewed heavily to the downside.
But he said the mining giants would remain profitable and actually enjoy greater market power as other players failed.
At BHP’s London annual general meeting in late October, chief executive Andrew Mackenzie said West Australian premier Colin Barnett was “completely wrong” to suggest BHP and Rio were flooding the iron ore market and potentially squeezing out smaller players.
“We are behaving as a rationale economic enterprise,” he said.
Rio chairman Jan du Plessis on Thursday admitted “challenging” commodity markets would continue in the short term.
“(But) at a time of significant distress for late-entrant and high-cost producers Rio Tinto is in a position of strength,” Mr du Plessis told shareholders.
“In times of increased market volatility, investors seek strength, reliability and consistency and, in such times, Rio Tinto thrives.”
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