Rio Willing to Cut Iron Ore Volumes, Calling Time on China Race

  • Company looking to maximize cashflows from Pilbara operations
  • Second-largest exporter driven by margins, not market share

Signage for Rio Tinto Ltd. is displayed atop the company's offices in the central business district of Perth, Australia, on Friday, Oct. 28, 2016. Australian bonds tumbled, sending 10-year yields up by the most in more than three years and adding to a global debt-market selloff that followed the shock election of Donald Trump as U.S. president.

Photographer: Brendon Thorne/Bloomberg

Rio Tinto Group said it’s prepared to cut iron ore output if that’ll improve cashflow, signaling a major step back from the industry’s decade-long strategy to keep pumping ever-expanding supply onto the global market.

The world’s second-biggest iron ore exporter is driven by margins and not by market share, Chief Executive Officer Jean-Sebastien Jacques told investors during a seminar in Sydney. The company wants to make sure “we maximize free cash flow coming” from its Pilbara iron ore system and “if it means reducing the volume we will do it,” he said.

While Vale SA, the world’s biggest producer, is continuing to expand supply, the Rio de Janeiro-based company this month said it will reduce higher-cost iron ore production to protect margins amid a global glut. The largest exporters in Australia are raising supply at the slowest pace in years after resisting pressure to limit increases in output through the collapse in prices that spanned 2013 to 2015.

Rio’s comments “represent a shift in the major miners’ attitude toward expansion, especially as supply growth has already been moderating,” Dang Man, an analyst at Maike Futures Co. in Xi’an, said by phone. “If demand remains stable through next year, supply may call the shots on prices. Any output reductions in a relatively balanced market will be a boost for iron ore.”

Benchmark iron ore prices have advanced 74 percent in 2016 on strong steel demand in China as economic stimulus has spurred infrastructure investment to machinery production. Growth in iron ore demand is expected to be modest over the next decade and outpaced by increases in seaborne supply, BHP Billiton Ltd., the No. 3 exporter, said last week.

Rio, which Thursday held its forecast for 2017 shipments at between 330 million and 340 million tons, is planning to implement its first voluntary suspension in its Australian iron ore division since 2008 by halting mining and plant operations at the Hope Downs 4 asset from Dec. 21 and Jan. 4 as the site hits annual targets early, the company said this month.

Rio will consider a potential $2.2 billion development of the 40 million tons-a-year Koodaideri mine in Australia from 2019, which would deliver first ore from 2021 to replace declining output at other assets and allow current volumes to be maintained, the company said Thursday in a statement. Iron ore volumes can go up or down when seeking to optimize cashflow, Jacques said.

“Value over volume doesn’t mean pursuing the market share for the sake of it,” he said. “Let me be clear, we are not driven by market share.”

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