16/07/14 – Record Rio volumes can’t stop price fall
Iron ore has represented about 90 per cent of Rio Tinto`s profits for three years, but that could be easing despite another record production result on Wednesday.
Rio’s shipments for the first six months were up 20 per cent to a record 142.4 million tonnes and it has forecast an annual total of 300 million.
However iron ore prices slumped by a third during the half to $US89 a tonne last month and are currently at $US98 as China’s demand has slowed.
Rio, the world’s second largest miner, lifted full year guidance for refined copper from 260,000 tonnes to 300,000 tonnes driven by higher grades and recoveries at its Kennecott Utah Copper mine in the US and the ramp-up at Oyu Tolgoi in Mongolia.
First half copper production jumped 25 per cent to 170,000 tonnes driven by a sharp 50 per cent increase in June quarter production.
UBS head of resources research Glyn Lawcock said Rio was part of the problem as to why the iron ore price had come down.
It has forecast annual production of 295 million this year compared to 293 million in 2010 and is on target to produce more than 340 million in 2015 and finish its $A10 billion-plus Pilbara expansion.
BHP Billiton, Vale, Fortescue Metals and Gina Rinehart’s Roy Hill mine will also add large volumes to an over-supplied iron ore market.
Dr Lawcock said Rio and the other majors appeared to think the price was still high enough not to consider easing back.
“They believe the current price is encouraging supply into the market that’s not needed and therefore there is no incentive for them to slow down their developments at this point in time,” he said.
However he predicts there will be a shift in Rio’s sometimes criticised reliance on iron ore for cash when its first half financial results come out next month.
“The surprise might be in the profit numbers you see come through in some of the other divisions particularly aluminium where I think the potential for better realised pricing might surprise,” he said.
Analysts are divided on what will happen to the iron ore price.
Rio’s sales lag so it will feel the price effects in the second half and Deutsche Bank analyst Paul Young predicts a fall in full year net profit from $US10.2 billion to still healthy $US9.1 billion.
IG market strategist Evan Lucas said improvements in copper production would not take up enough of an earnings slack to offset the iron ore price’s fall.
Copper could contribute a far greater share of profits in the future as part of increased household consumption in the next stage of China’s economic development.
Rio produced a record 139.5 million tonnes of iron ore in the first half, less than its shipments because it is currently able to rail and ship more tonnes than it can produce.
Rio chief executive Sam Walsh said the operating performance was very strong and the company’s productivity and cost saving gains were helping the business deliver stronger shareholder value.
Rio’s shares climbed 84 cents, or 1.3 per cent, to $63.94 by 1500 AEST.
Source – DailyMail.co.uk