Rio Tinto CEO Says Iron Ore's 55% Rally About to Fizzle Out

  • Second-biggest miner expects volatile and softening prices
  • CEO Sam Walsh cites new production coming on later in 2016

Iron ore’s rally from a record low isn’t sustainable as output is set to increase, according to Rio Tinto Group, the second-biggest exporter.

QuickTake Iron Ore Wars

Prices may fall in the second half as the new supply offsets improving demand from China, Chief Executive Officer Sam Walsh said. “I’ve said all along that we expect the iron ore prices will be volatile. That’s what we’re seeing,” Walsh told reporters after the company’s annual shareholder meeting in London.

Iron ore has rallied 55 percent from a December low amid signs of a rebound in demand from China’s mills and as the nation’s policy makers signaled they’d support growth. The top miners, including Rio and BHP Billiton Ltd., saw profits plunge last year as iron ore plummeted under pressure from a glut. At Rio’s meeting, Chairman Jan du Plessis denied allegations, cited by a shareholder, that the company is colluding with BHP to force out high-cost producers.

Comparing Rio Tinto to Saudi Arabia, which is seen using a similar strategy to push out U.S. competitors in oil markets, is “absolute nonsense,” du Plessis said on Thursday. “We have no desire to squeeze anybody out of the market. We’re not flooding the market. We’re not trying to be Saudi Arabia at all.”

Rio, which is scheduled to report first-quarter production results on Tuesday, forecasts 2016 iron ore production of 350 million metric tons, a volume that may see the miner usurp Rio de Janeiro-based Vale SA as the world’s top supplier. Australia’s government forecast last week that the nation’s exports will rise 10 percent to 846 million tons this year.

Ore with 62 percent content delivered to Qingdao was at $59.38 a dry ton on Thursday, 36 percent higher this year, according to Metal Bulletin Ltd. Prices sank to $38.30 on Dec. 11, the lowest in daily data back to 2009, before rallying 23 percent in the first quarter. The advance included a record one-day jump of 19 percent on March 7.

Data from China on Friday showed gross domestic product rose 6.7 percent in the first quarter, meeting the median projection of economists. Still, while crude-steel output gained 2.9 percent to a record 70.65 million tons in March from a year earlier, production over the first three months of this year was lower than the same period of 2015.

Walsh’s skepticism that iron ore’s gains will endure is shared by some forecasters. RBC Capital Markets said April 12 global oversupply would continue to weigh on prices while lower steel production in China hurts demand. Capital Economics Ltd. has said it expects a large surplus this year.

Demand in China this year may have been “front-end loaded and will taper off,” Liberum Capital Ltd. analysts wrote in an April 13 note, forecasting prices will fall below $40 before the second half. Iron ore may retreat to $44 in the fourth quarter, according to the median of 10 forecasts compiled by Bloomberg.

Iron ore’s surprise surge has benefited miners’ shares. While Rio ended 0.8 percent lower at A$48.20 in Sydney, the stock is 11 percent higher this week. BHP advanced 19 percent over the week and Fortescue Metals Group Ltd. rose 14 percent, even after shedding 4.7 percent on Friday.

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