Rio Tinto's (LON:RIO) Pilbara Expansion Helps Bolster Iron Ore Output
Rio Tinto (LON:RIO) produced record volumes of iron ore in the first half of 2014 thanks in large to the expansion of its mines in the Pilbara region of Western Australia.
The UK miner increased iron ore production by 11 percent, producing 139.5 million tons in the fiscal first half despite weak prices of the metal. Rio Tinto’s shipments rose 20 percent to 142.4 million tons.
"Our iron ore expansion continues to deliver high-margin growth reinforcing our position as a low cost producer," Rio Tinto Chief Executive Sam Walsh said in a stock exchange filing.
“It has allowed us to increase shipments of our Pilbara Blend products, providing our customers with reliable, long-term supply of stable quality.”
Rio’s reliance on the commodity has caused concerns among investors. Iron ore prices have fallen from approximately $135 a ton last year to below $90 a ton last month, and many believe global mining companies are adding new supply too quickly
Miners are betting that Chinese iron ore demand will remain stout. In the first half of 2014 China imported 457 million tons of iron ore, up 19 percent from a year earlier.
BHP Billiton CEO Andrew Mackenzie believes Australia should accommodate China as much as possible, working towards the maximum degree of free trade with the nation’s biggest trading partner.
"I think it's a positive step unquestionably to more intimately tie Australia to the main market for resources going forward," said Mackenzie. "Increased ties between Australia and the rest of Asia can only be good for the health and vibrancy of this economy going forward. A country like Australia can offer them something they don't have, which is resources."
With more than 90 percent of its profits coming from iron ore, Rio Tinto believes its Pilbara mines will continue to advantageous even at lower prices, with high-cost mines in China most at risk of sustained downturn.
Copper, iron ore surge as Chinese investors unleash demand
The reopening of major industrial economies is sparking a surge across commodities markets from corn to lumber, with tin climbing above $30,000 a tonne for the first time since 2011 on Thursday.
In the wake of mounting evidence of inflation fuelled by higher raw materials prices, investors are also increasingly focused on when the U.S. Federal Reserve might start throttling back its emergency support.
Many banks say the rally has further to run, particularly for copper, which will benefit from rising investment in new energy sectors. Copper is at the highest in a decade, fueling bets it will rally further to take out the record set in February 2011. Steel demand is surging as economies chart a path back to growth just as the world’s biggest miners have been hampered by operational issues, tightening ore supply.
“The long-term prospects for metals prices are ‘too good’ and point to higher prices in the next few years,” said Commerzbank AG analyst Daniel Briesemann. “The decarbonization trends in many countries, which include switching to electric vehicles and expanding wind and solar power, are likely to generate additional demand for metals.”
Trading house Trafigura Group and several major Wall Street banks including Goldman Sachs Group Inc. and Bank of America Corp. expect copper to extend gains.
Copper rose as much as 1.6% to $10,108.50 a ton on the London Metal Exchange before trading at $10,080 as of 4:07 p.m. in London.
Benchmark spot iron ore prices rose to a record, while futures in Singapore and China climbed.
The boom comes as China’s steelmakers keep output rates above 1 billion tons a year, despite a swath of production curbs aimed at reducing carbon emissions and reining in supply. Instead, those measures have boosted steel prices and profitability at mills, allowing them to better accommodate higher iron ore costs.
Spot iron ore with 62% content hit $201.15 a ton on Thursday, according to Mysteel. Futures in Singapore jumped as much as 5.1% to $196.40 a ton, the highest since contracts were launched in 2013. In Dalian, prices closed 8.8% higher.
Erik Hedborg, Principal Analyst, Steel at CRU Group commented: “Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise. Iron ore producers are enjoying exceptionally high margins as well, around two thirds of seaborne supply only require prices of $50 /dmt to break even.”
Still, some analysts including Commerzbank’s Briesemann expect a short-term correction as metals become detached from fundamentals. There’s also a risk that China could engage in policies that may cool demand for iron ore and copper.
The metals rally has boosted concerns about short-term Chinese demand. Some manufacturers and end-users have been slowing production or pushing back delivery times after costs surged, while weaker-than-expected domestic consumption has opened the arbitrage window for exports.
Tin climbed as much as 2% to $30,280 a ton on the LME, boosted by rising orders for the soldering metal. Tin is at the highest since May 2011, with a 48% gain this year making it the best performing metal on the LME.