“We’ll be OK”: Rio Tinto CEO says $20 a tonne iron ore production cost to shield against price volatility

Rio Tinto’s CEO Sam Walsh said the company is well-placed to ride out the current price rout gripping iron ore, but warned if the value plummets to $US80 a tonne, others would not be as lucky.

Speaking to Bloomberg TV overnight, Walsh said the current lag in the value of iron ore was a late onset hangover from the GFC, but was confident in his "robust business". 

Iron ore posted a modest gain on Tuesday, adding $0.40 to close at $US92.50 per tonne.

However this still marks a 31% decrease since the start of 2014, with predictions that oversupply and a slow-down of growth in China will lead to further falls.

Rio has been a massive driver of expansions, adding millions of tonnes of seaborne supply to the market, with more to come.

In the Pilbara, the company has already reached production levels of 290 million tonnes per annum and is targeting 360 million tonnes per annum into the future.

It has also signed up to develop plans for a new $20 billion iron ore mine in Guinea, expected to produce  95 million and 100 million tonnes a year.

Despite oversupply concerns, Walsh said the steelmaking ingredient will find a home, revealing Rio was shielded against price volatility because of its low cash costs. 

“We are the lowest cost producer in the world with costs of $20 per tonne compared to the current price of around $92 per tonne,” Walsh said.

“I think we’ll be OK."

Responding to concerns around Chinese growth, Walsh echoed sentiments expressed by Fortescue Metals Group CEO Andrew Forrest, stating the demand for commodities would continue.

“The world is going to require all of the commodities we supply, including iron ore, and we’re confident with projections that as we go forward the expansions that we’re making will be justified,” Walsh said.

Walsh said he expected 7.3 or 7.5 per cent growth in China, again stating, “we’ll be OK”.

While Walsh expects iron ore to level out at over $US100 a tonne, and not the $US80 widely predicted, he stated that if the value did drop this low “a lot of my friendly competitors are going to disappear”.

The comments came as it was revealed miners who produce lower grade iron ore are bearing the brunt of falling prices, with customers asking for higher discounts against the benchmark price.

The spot price is applied to ore that contains 62 per cent iron (Fe) however Atlas Iron, that produces ore containing 58 per cent Fe, said it was being paid discounted rates.

Atlas boss Ken Brinsden said increasing supply was placing further downward pressure on 58 Fe products while the market was adjusting to oversupply issues, The Australian reported.

“Atlas considers that the discount level will tighten up as the market reaches a more settled state,” he said.

Meanwhile, BC Iron boss Morgan Bell also said his company was receiving less for its ore.

“Yes, we are discounting in the short term because the market dictates that, but it probably just eradicates the in-built premium we get for pricing off a (benchmark) 62 per cent index,” Bell said.

“We saw that happen in September 2012 when we had to put small discounts on the ore, and as the price moved again we saw those discounts dissipate.”

In line with the other heads of iron ore miners, Bell said he expects the long-term price to sit in the $US100 to $US120 range in the medium term.

Morgan said his company negotiated contracts on a monthly, two-monthly and three-monthly averaged price which helped to ward off some volatility. 

With environmental regulations tightening in Asian markets, particularly in China in response to pollution and energy consumption concerns, higher grade ore is expected to be the preferred choice for mills, potentially displacing more product and hitting lower grade produces even harder.

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