Rio Tinto Group (RIO), the second-biggest iron ore exporter, expects prices to remain volatile in the first half as demand slows from Chinese steel mills and the European debt crisis crimps the outlook for global growth.
“We believe we’ll go through a period of uncertainty probably in the first six months of the year with volatility, then we see some smoother sailing,” Sam Walsh, the company’s iron ore and Australia chief executive officer, told reporters in Perth. “Trying to resolve the issues in Greece and elsewhere creates an amount of uncertainty. People are holding back waiting for things to be resolved, waiting for the comfort that they can see where the economy will be going.”
Prices, which have dropped 2.3 percent since the start of the year, may be softer in the first half before demand picks up in the second, Anglo American Plc said last month. China, the largest steelmaker, boosted annual output by the slowest pace in three years in 2011 with some mills including Maanshan Iron & Steel Co. reporting annual profit fell by more than 50 percent.
“There’s an element of softness there,” Walsh told reporters on Feb. 18. “From the profit results from steel mills you can see there are some issues.”
Rio rose 1.2 percent to A$68.83 at 1:55 p.m. in Sydney trading, compared with a 0.7 percent gain in the benchmark S&P/ASX 200 Index.
The mills haven’t restocked as is typical in the weeks after the Lunar New Year on concern of a lack of government support for steel-consuming housing and infrastructure projects, Tom Price, commodity analyst at UBS AG in Sydney, said today in an e-mail. Iron ore dropped for nine straight days this month, the longest run in more than three months. It fell 30 percent during October as purchases in China slowed.
Vale SA, the world’s largest iron-ore producer, said last week fourth-quarter profit fell 21 percent, missing analysts’ estimates, after prices dropped and the debt crisis caused European shipments to slump. The company said it expects a “tight” market for the raw material this year because of increasing Chinese demand and constrained supply expansion.
“The outlook for iron ore is one of robust demand, though not without some caution as a result of the European and American economic challenges,” Walsh said. “We’re fortunate that China is a managed economy and that government has committed to continue to invest in the sort of basic fundamentals that are needed for the urbanization and industrialization of China.”
The People’s Bank of China on Feb. 18 decided to reduce the proportion of cash that banks must set aside by half a percentage point to 20.5 percent, to help ease a cash shortage in the financial system. China’s gross domestic product grew 8.9 percent in the fourth quarter from a year earlier, the slowest pace since the first half of 2009.
“Although the rate of GDP growth in China is starting to slow, we predict a soft landing with growth around 8 percent this year,” Walsh said.
Rio last year made 78 percent of its net income from iron ore sales, data compiled by Bloomberg shows. The company is expanding iron ore output in Australia’s Pilbara region by more than 50 percent to 283 million metric tons by next year.
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