Rio Tinto banking on stable iron ore prices

Rio Tinto boss Sam Walsh says iron ore demand will remain strong on the back of Chinese growth, urbanisation and supply constraints, with predictions the Asian power-house will require one billion tonnes by 2030.

The continuing strength of the steelmaking ingredient comes as the slowing demand from China usually seen at this time of the year has failed to materialise, with the price remaining between $US130 and $US140 per tonne in recent months.

Rio, which last week announced a $400 million spend to expand its iron ore production to 360 million tonnes a year by 2017, told investors yesterday that the upswing would last long-term.  

With Chinese growth, infrastructure projects and urbanisation set to continue, Rio chief Sam Walsh also said supply constraints would help keep the resource stable.

"Poor returns on some investments made over past years are leading investors to demand higher rates of return and lower capital expenditure," Walsh said.

"This means the rate of supply growth across some commodities is likely to be lower than many have previously predicted."

Rio Tinto iron ore chief executive Andrew Harding said the company is confident about the long-term prospects of iron ore and by adding tonnes Rio will be able to capture a greater share of demand.

"We also see positive signs for iron ore demand coming out of the recent Chinese Plenum," Harding said.

"Urbanisation will remain a priority and the recent trends in housing and infrastructure are likely to continue

Rio reaffirmed forecasts Chinese steel demand, which was more than 700 million tonnes this year, will peak in 2030 to a billion tonnes.

And despite Rio, BHP and FMG planning expansions, supply constraints within China were also highlighted as production costs in the country intensify.

"Chinese domestic iron ore supply is highly price sensitive and as reserves are depleted, grades continue to decline and labour and power prices are increasing," Harding said.

"It is inevitable China's domestic iron ore cost base will continue to rise.”

The demand revival follows a report by the World Steel Association which showed global steel production rose to 133 million tonnes in September, a 6.1 per cent jump on last year’s numbers.

Rio’s iron ore business made up 99 per cent of its underlying 2012 net profit and overall Australia’s iron ore miners have added over $65 billion to their value over the last financial year as the expected crash in iron prices didn’t come.

The shares of iron miners have jumped as a result, with both big-ticket companies and medium producers reaping the rewards.

BHP is up 21 per cent, or $33 billion, and Rio is up 25 per cent, or $21.7 billion.

However, predictions by some analysts suggest what goes up must come down, with expectations iron ore prices will dip to $US115 by the end of the year, and as low as $US90 by the end of 2014.

"We hold the view that prices will move lower over the coming weeks as incrementally growing supply, against strong but not immediately rising demand, gradually loosens the short-term market balance," Credit Suisse said.

"Iron ore's tendency to overshoot, when declining prices leave consumers unwilling to risk catching a falling knife, means the possibility of more dramatic price action cannot be completely discarded," the bank said.

For now, with prices up, getting product extracted and exported is key, with Rio’s new expansion paving the way for a combination of brownfield expansions and low-cost productivity gains which will result in lower capital cost per tonne.

The miner said all-in capital intensity for additional tonnes is estimated to be between $US120 and $US130 a tonne, including the cost of infrastructure growth and mine capacity.

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