Brave to Call Bottom of Commodities Rout, Rio Chief Walsh Says

  • Second-biggest miner sees pressure still on metals to energy
  • Walsh joins Goldman Sachs in cautioning on bullish sentiment

Rio Tinto Group says it’s a brave move to call an end to the commodities rout with the outlook clouded by volatile prices and uncertainty over issues including the U.S. election and Britain’s vote on European Union membership.

Pressure remains on prices across all sectors from metals and energy to agricultural products, while some areas of the economy in China, the top commodities consumer, continue to slow, Chief Executive Officer Sam Walsh told reporters in Brisbane, Australia. He pointed to “excessive” trading volumes in Chinese iron ore futures that’s spurred government intervention.

Sam Walsh in Brisbane on May 5.

Photographer: Patrick Hamilton/Bloomberg

“It is far more volatile than we’ve experienced in the past,” Walsh, who will retire on July 1, said following an annual meeting of the world’s second-largest miner. “In that environment, calling the bottom is a brave move. It will turn though, as this is a cyclical industry.”

Walsh joins pessimists including Goldman Sachs Group Inc., which said last month that it sees no “sustainable shift in fundamentals” and expects higher U.S. interest rates will keep the outlook bearish. The bank forecasts oversupply will see prices of iron ore, Rio’s top earner, retreat to about $35 a metric ton by year end after touching $70.46 on April 21.

‘Uptick Hope’

“Iron ore bounced up to $70 a ton and I said I didn’t expect it to stay there -- guess what, today it’s down at $60 a ton.” Walsh told reporters. “Some people can see a bit of an uptick, and I don’t know whether it’s hope. You have to look at the fundamentals.”

Action by China’s policy makers to curb a bout of speculative trading in the nation’s commodities futures markets could also weigh on prices as investors seek to exit positions in raw materials, according to Fat Prophets. Rio’s Sydney-listed shares have slumped about 6.9 percent this week, also dragged down by lower metal prices and sluggish Chinese manufacturing data.

There’s plenty of optimistic opinions in the industry. Some signs of a recovery in China are helping to put a bottom under the collapse in metals to energy prices, Tom Albanese, CEO of Vedanta Ltd. and Walsh’s predecessor at Rio, said on a conference call last month. While Templeton Emerging Markets Group Executive Chairman Mark Mobius says a rebound in raw-material markets is only getting started after prices sank too far.

The Bloomberg Commodity Index, a gauge of returns on 22 raw materials including gold and copper, has rebounded since bottoming in January, when it sank to the lowest level since at least 1991. It advanced 8.5 percent in April to a second straight monthly gain.

Scant Deals

Walsh, appointed in January 2013, will be succeeded by Jean-Sebastien Jacques, previously head of Rio’s copper and coal division. The change may not signal a shift from aggressive cost-cutting to a renewed focus on growth as some investors have suggested, Walsh said.

Even as competitors including Anglo American Plc and Glencore Plc come under pressure to sell more assets to cut debt, Rio hasn’t yet identified opportunities for mine acquisitions. “Everybody has an expectation that there are some tier one, low-cost, expandable assets on the market,” Walsh told reporters. “Quite frankly at this stage there are not, there are just simply not assets that we might be interested in.”

The producer’s board is reviewing plans to approve the expansion of its Oyu Tolgoi copper and gold mine in Mongolia. “We will continue to maximize free cash flow and deliver a focused Tier 1 growth pipeline at the right pace,” Jacques told investors at the Brisbane meeting.

An approval process is also continuing for the Resolution copper joint venture in Arizona, according to Walsh. A land swap related to the development has drawn opposition from objectors including Vermont Senator Bernie Sanders.

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