Why would we choose not to make money? Rio’s iron ore boss speaks out

Rio Tinto’s iron ore boss Andrew Harding says long-term demand for the commodity is strong, but warned high-cost producers would not last long in the current market.

Speaking to Rio’s M2M magazine, Harding said while demand growth for iron ore isn’t as strong as it was, the long-term outlook was sound.

Pointing to the continued urbanisation of people in China, India, Africa, and South America, Harding said the need for steel would remain strong.

“As developing countries urbanise, and people move from rural to urban ways of life, infrastructure needs change. They build tall apartment blocks and link up the urban areas with roads, railway lines, airports and bridges – all using massive amounts of steel,” Harding said.

Harding also highlighted the importance of demand from the developed world in replacing ageing infrastructure.

“Even though Japan, for instance, has had no to very low growth for a considerable period, it’s still been importing around 130 million tonnes of iron ore every year,” Harding explained.

However, with the price of iron ore trading at $US60.90 per tonne, the iron ore boss said being a low cost producer was the key to surviving the market downturn.

“At Rio Tinto, we can make money on every tonne we sell, and we can indeed sell every tonne. So we will continue to make maximum use of the infrastructure we have installed for our operations,” Harding said.

Sounding a warning to juniors, Harding said miners at the opposite end of the cost-curve will go out of business unless they can cut their costs “dramatically”.

“They’re not profitable in the long term, and definitely not through cyclical lows like we’re seeing now,” Harding said.

Harding said while he was sympathetic towards the people in these companies who may lose their jobs, and towards the suppliers to these companies that may lose their contracts – he must stay focused on ensuring Rio’s business strategy “thrives”.

The miner has come under fire in recent months for continuing with expansion plans in the face of decreased iron ore demand, and falling prices.

Rio plans to produce 330 Mt/a in 2015, and 350 Mt/a  in 2017.

Some industry players have accused Rio of pushing tonnages into the market in a deliberate ploy to keep the iron ore price low, and in doing so, forcing high cost tonnes out of the market.

Rio denies the claim, stating its strategy to remain the lowest-cost producer in the industry is in the best interests of its shareholders.

Harding said if Rio did not go ahead with growing capacity, other companies would, and this meant shareholders would lose revenue associated with extra volume.

“We can expand because we’re the lowest-cost producer. We make money on every tonne, so why would we choose not to make money?”

“High-cost producers may have entered the market thinking the increase in demand was never going to take a pause, but it has. This has had an immediate impact on price, and whereas they then can’t continue, we can.

“There is no logic in holding back supply in the hope prices might go up. They might momentarily increase, but we’re not in the business for the moment, we’re in the business for the long term.” 

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