Photographer: Jack Atley/Bloomberg

Rio Tinto to Slow Pace of Iron Ore Expansion on Supply Glut

  • The steel-making material tumbled last month to record low
  • Producer is freezing salaries from CEO downward in 2016
Rio to Pare Pace of Iron Ore Output

Rio Tinto Group, the world’s second-largest iron ore exporter, will trim the pace of its supply expansion as prices slump amid a market glut.

Production of the raw material used to make steel will increase about 7 percent this year to 350 million metric tons, less than an 11 percent expansion in 2015, according to a statement from London-based Rio Tuesday. BHP Billiton Ltd., which reports output Wednesday, forecasts 6 percent growth at its Australian mines in the year to June 30 from a 13 percent jump a year earlier.

“Whenever you see production growth slow in a market that’s in a glut then that’s good news,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by phone. “However, they are still raising production and that’s going to continue to put pressure on iron ore prices this year.”

The raw material has sunk more than 75 percent from a 2011 peak and last month reached the lowest in daily price records dating back to May 2009 as steel output and demand dropped in China. Production from China’s steel mills, which make half of global supply, contracted 2.3 percent last year, the first decline since at least 1991, the statistics bureau said Tuesday.

Lower Prices

The top suppliers, including Brazil’s Vale SA and BHP, continue to boost output, a strategy that’s helping trim costs but adds to the world glut. Ore with 62 percent content delivered to Qingdao advanced 3.7 percent to $42.66 a dry ton on Monday after dropping 2.4 percent last week, according to Metal Bulletin Ltd. The commodity bottomed at $38.30 on Dec. 11.

Rio Tinto added 0.3 percent to A$38.82 in Sydney trading, trimming its decline over the past year to 28 percent.

China’s weakest full-year growth since 1990 and the transition away from metals-intensive sectors to consumer-led expansion means the outlook for commodity prices remains muted, Chief Executive Officer Sam Walsh said last week in an e-mail to staff, a copy of which was obtained by Bloomberg News. Rio will freeze salaries for this year and limit travel expenditure.

Challenging Market

Rio is handling a “challenging market backdrop for the industry,” Walsh said Tuesday in the statement. “We will continue to focus on disciplined management of costs and capital to maximize cash flow generation throughout 2016.” Exploration and evaluation spending was cut 25 percent to $576 million in 2015, Rio said.

QuickTake Iron Ore Wars

While steel output and demand are sliding in China for the first time in a generation, ore imports are increasing as local miners shutter capacity. Purchases rose 2.2 percent to a record 952.72 million tons in 2015, customs data show.

Iron ore prices still haven’t reached a bottom, according to Citigroup Inc., which last week raised the prospect of prices falling below $30 under its most bearish forecast. Commodity markets probably need further losses to instigate the production cuts required to end gluts, Goldman Sachs Group Inc. said in a report on Jan. 15.

Surprise Needed

“It’s good to see the rate of growth slow in what can only be described as a very difficult market, but it’s in line with expectations,” Jeremy Sussman, an analyst with Clarksons Platou Securities Inc., said by phone from New York. “For investors to get excited about iron ore then they need to see some surprise from the big four producers in terms of slower than expected year over year production growth.”

Rio’s output in the three months to Dec. 31 rose 10 percent to 87.2 million tons, the producer said. That compares with 79.1 million tons in the same period a year earlier. It missed a 91 million ton median estimate among six analysts surveyed by Bloomberg.

Copper output declined 13 percent to 111,100 tons on lower production at Kennecott and falling grades at Escondida, Rio said in the statement. That compares with the 116,000 ton estimate among five analysts. Production will climb as much as 24 percent in 2016 to between 575,000 tons and 625,000 tons, on rising output in the U.S. and from its share of joint venture production at Indonesia’s Grasberg mine.

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