Minews - Rio Tinto aims to boost iron-ore output, despite supply glut

(Minews) - Rio Tinto PLC aims to dig up 18% more iron ore from its Australian mines this year, squeezing smaller rivals from Canada to China and defying critics as a supply glut pushes prices to a five-year low.

The Anglo-Australian mining company has been among the most aggressive in exporting more iron ore to China, despite signs that demand from the country’s steel mills is struggling to keep up as the economy there slows. Rio Tinto’s planned increase in production, coupled with big new mines such as Gina Rinehart ’s Roy Hill venture, could see as much as 100 million more tons of iron ore shipped from Australia this year after a record year for such exports in 2014.

The surge in Australian iron-ore supply is worrying consumers as it concentrates production in the handful of only a few companies, including Rio Tinto, despite its downward pressure on prices. Some smaller iron-ore miners, such as Cliffs Natural Resources Inc., have weighed closing mines that have become unprofitable.

Rio Tinto, however, is betting that China will need more of the commodity to make steel for its skyscrapers and industries such as auto manufacturing. China already buys three out of every five tons of iron ore traded by sea, and could import more if Beijing ramps up infrastructure spending to boost its flagging economy.

It is a calculated risk made possible largely by the fat profit margins on iron-ore sales. While iron-ore prices are around half their level in early 2014, Rio Tinto is still making enough money to consider returning capital to shareholders.

“Putting more material into an oversupplied market may seem foolish, but if you’re the best at what you do and the higher-cost mines drop out, why wouldn’t you do it?” said Ric Ronge, a Melbourne-based fund manager for Pengana Capital, which holds Rio Tinto shares.

Iron ore was one of the worst-performing commodities of 2014, and few analysts expect a recovery anytime soon. Prices tumbled to around US$70 a ton from more than US$130 at the start of last year, triggered largely by excess supply.

Rio Tinto isn’t alone in raising production sharply in the remote Pilbara iron-ore mining hub in Australia’s northwest. BHP Billiton Ltd. and Fortescue Metals Group Ltd. are also squeezing more from existing mines, while Ms. Rinehart—Australia’s richest person—is building a new 55-million-ton-a-year mine due to start shipping ore before the end of the year.

On Tuesday, Rio Tinto said it expects to produce 330 million tons of iron ore from the Pilbara in 2015. That compares with output of 280.6 million tons in 2014—which was itself a record and 12% higher than the year earlier. By 2017, Rio Tinto said it could be producing more than 350 million tons in Australia.

Swamping the market with more iron ore has drawn criticism from some investors and rivals, including Glencore PLC Chief Executive Ivan Glasenberg, who has said the strategy has hurt prices and made new projects in places such as Africa less viable.

“The strategy of trying to put the small guys out of business may be working to some point, but it is also causing a lot of financial pain for the majors,” said Donald Williams, Sydney-based chief investment officer at Platypus Asset Management. He sold his holdings in BHP, the world’s No. 3 iron-ore miner, around six months ago, and his Rio Tinto shares a year before that.

Cliffs, a midsize U.S.-based miner, has already faced write-downs, laid off workers and looked at ways to offload its Bloom Lake mine in Canada. Insolvency specialists were called in to Australia’s Western Desert Resources because iron-ore prices fell too far.

Investors and miners have estimated about 100 million tons of high-cost production—including many mines in China, where iron ore tends to be more expensive to produce than in Australia or Brazil—was shuttered in 2014.

Still, UBS forecasts a widening oversupply in the seaborne market, growing from an estimated 35 million tons in 2015 to more than 200 million by 2018.
Executives at Rio Tinto, which runs the world’s No. 2 iron-ore business by volume, behind Brazil’s Vale SA, shrug off the impact of rising supply. They say the scale of Rio Tinto’s business and ore quality allows the company to produce material profitably and at a significantly lower cost than competitors.

Rio Tinto’s global iron-ore production, including from its Canadian operations, rose 11% to 295.4 million tons last year. BHP Billiton is due to report its production figures for the six months through December on Wednesday.