Rio Tinto Group (RIO) expects a decline next year in the price of iron ore, the source of most of its earnings, saying global supplies will increase.
“There will be capacity coming on next year,” including at Rio, the London-based company’s 63-year-old Chief Executive Officer Sam Walsh said in an interview in the city. “I expect that iron-ore prices will soften a bit next year but it will still be a good business to be in.”
Rio is the biggest exporter of the steelmaking ingredient after Brazil’s Vale SA (VALE3), generating $24 billion in sales of the raw material last year primarily at its Australian operations. Banks from Goldman Sachs Group Inc. to UBS AG expect supply expansions led by Australian producers to push the seaborne market into surplus next year.
“We remain structurally bearish on the outlook for iron ore and see 2014 as the year when the iron-ore price starts to decline,” Goldman analysts wrote in a Dec. 12 report. That trend will continue as supply is added, they said.
The price of iron ore has gained 22 percent since sinking to a 2013 low of $110.40 a metric ton in May. The strength of the price as well as increased imports into China, which reached a record last month, have been surprising, Walsh said yesterday. China is the world’s biggest buyer, representing about 60 percent of global demand, according to Goldman.
“Domestic supply in China has just not been able to keep up with their needs, therefore you’ve seen increases in supply through import,” Walsh said. “You’ve also seen a range of projects that were announced to come on stream in 2013 that just haven’t happened. Of the projects that were announced to come on stream around now and 2014, about a third have come on.”
Ore with 62 percent iron content delivered to the Chinese port of Tianjin has declined for the past five days, dropping 0.5 percent to $134.30 a dry ton yesterday, according to The Steel Index Ltd. Prices climbed to $158.90 a ton in February, the highest this year.
About 400 million tons of new supply will be delivered by 2015, pushing prices down by about 43 percent to an average of $80 a ton that year, Goldman analysts said last week.
“I’d be comfortable with it but it would surprise me,” Walsh said of the price forecast. “It would surprise me purely and simply because that would grind iron-ore expansions to a halt.”
Smaller producers would probably be unprofitable if the price dropped to that level, he said.
Iron ore accounted for 78 percent of Rio’s earnings before interest, taxes, depreciation and amortization last year. It was also the biggest profit contributor for BHP Billiton Ltd. (BHP), the world’s largest mining company, comprising 43 percent, or $12.2 billion, of Ebitda in the year through June. BHP is raising output to 212 million tons this year.
Rio is expanding production in Australia’s Pilbara region to more than 350 million tons from 290 million tons by 2017. Fortescue Metals Group Ltd. (FMG) is tripling its capacity in the Pilbara to 155 million tons.
Rio may be able to expand output further to 400 million tons in the Pilbara through more efficient use of port and rail infrastructure, Rob Clifford, an analyst at Deutsche Bank AG in London, wrote in a Dec. 3 note.
“I’m not going to limit anything except to say there’s a lot of optionality there and we are just blessed with good deposits in proximate location to China,” said Walsh, who led Rio’s iron-ore unit before being promoted to CEO in January. “We’ve got very significant deposits there, resources and reserves underpinning our business. A lot is going to depend on the market.”
Since his appointment, Walsh has cut $2 billion in costs at Rio, curbed investment in future projects and driven higher productivity from mines amid an industrywide effort to rein in spending that’s led to an oversupply of some minerals.
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