Rio Warns on Iron Ore Volatility as High-Cost Mines Close

The global iron ore market is in a period of transition as high-cost mines are displaced by cheaper output, according to Rio Tinto Group, which highlighted the potential for significant volatility until a new balance is found.

There have already been cuts at mines in China, as well as by other higher-cost seaborne suppliers, Alan Smith, Rio’s Asia president for iron ore, told a conference in Beijing, according to a copy of his remarks. Crude-steel output in China, the largest producer, will keep on rising, according to Smith, who forecast a 21.5 percent increase from 823 million metric tons last year to 1 billion tons by 2030.

Iron ore sank 47 percent last year and extended losses in 2015 after London-based Rio, BHP Billiton Ltd. and Fortescue Metals Group Ltd. boosted low-cost production, spurring a glut just as growth slowed in China. Expansions by major producers will probably continue as they are still mining at a profit, according to Goldman Sachs Group Inc. Smith said on Wednesday while demand growth has slowed in China, there’s no collapse.

“The market is in a period of transition, where high-cost supply is being displaced by lower-cost seaborne expansions,” Smith told the audience. “This transition does not happen smoothly, and can result in significant volatility before the market finds the new equilibrium.”

Ore with 62 percent content delivered to Qingdao, China, slipped 1 percent to $62.58 a dry ton on Wednesday, according to Metal Bulletin Ltd. It dropped to $62.21 on Friday, the lowest price on record going back to May 2009. The commodity fell 13 percent in January, the biggest monthly drop since May.

Peak Steel

Rio’s prediction for further growth in China’s crude-steel output over the next 15 years runs counter to a forecast from Morgan Stanley. China will reach peak steel this year, and output will decline after 2015 as the economy matures, the bank said in a report on Monday. Asia’s largest economy accounts for about half of global production.

“China’s massive steel industry appears to be experiencing a crisis of confidence,” Morgan Stanley analysts including Tom Price wrote in a separate report on Tuesday, citing feedback from the country, lower products prices and a lack of credit.

Crude-steel output in China surged more than 12-fold between 1990 and 2014, and the increase is emblematic of the country’s emergence as the world’s second-largest economy. Demand soared as policy makers built out infrastructure, shifted millions of people into cities and promoted consumption of autos and appliances. Last year, China produced more steel that U.S., Germany, Japan and Russia combined.

Demand Growth

Future steel demand growth will rely less on investment in construction and more on increased domestic consumption in sectors such as automotive, transport and machinery, said Smith. There were also other iron ore growth markets developing in Southeast Asia, India, Africa and the Middle East, he said.

Rio’s plans to expand low-cost output remained on track, said Smith. Production from Australia’s Pilbara region was targeted to increase to 330 million tons in 2015 and 350 million tons by 2017, he said.

“It is also our intention to remain positioned at the very low end of the 2020 contestable market cost curve,” said Smith. “On a China-delivered basis, we are targeting around $35 a ton unit cost.”

Rio climbed 0.4 percent to 3,087 pence in London Stock Exchange trading today. The stock is 2.9 percent higher this year after dropping 12 percent in 2014.

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