Iron ore price fall speeds up Rio Tinto cost cuts

Thu Oct 4, 2012 10:15am EDT

* Iron ore price falls 40 percent in a year

* Rio cuts jobs in London, Australia

* Moves departments to lower-costs locations

By Silvia Antonioli and Clara Ferreira-Marques

LONDON, Oct 4 (Reuters) - A steep fall in iron ore prices over the last three months has forced global miner Rio Tinto to accelerate and deepen a cost-cutting programme across its back office, sources close to the situation said this week.

This follows efforts of competing miners, including BHP Billiton and Anglo American, to tame rising costs at a time of sluggish economic growth and weaker metals prices.

Australia's Rio Tinto - which gets some 80 percent of its profits from iron ore and is the diversified miner most exposed to fluctuations in the steelmaking ingredient - is cutting jobs in London and Melbourne, a source with knowledge of the situation told Reuters.

It is also moving various departments to lower-cost offices, the source said. The exploration, purchasing and shipping departments, for example, are being moved from Australia to Singapore and the health and safety department, currently in London, is being moved to India.

The miner had already announced its intention to shut down its Sydney office.

"The company was taken by surprise by the iron ore price fall," the source said.

"Rio was very bullish on iron ore until a few months ago but those predictions have proven completely wrong so now it is drastically trimming costs, cutting positions outright or shipping departments or parts of them abroad," he said.

Iron ore lost 35 percent of its value in the July-August period. It recovered some ground in the last 4 weeks but its price remains 40 percent lower than a year ago.

Shares in Rio Tinto, which is the world's second-largest iron ore producer after Brazil's Vale, have fallen by about 10 percent since early July.

With iron ore prices at around $100 a tonne cost-and-freight (cfr) to China currently, the miner can still count on solid margins as it can produce and ship iron ore to China for about $50 cfr, but the firm has to cut down spending on support costs, including administrative and back office roles, the source said.

"Like others in the industry, Rio Tinto is facing the challenge of increasing costs. We are actively seeking ways to tackle this," said a spokesman for Rio Tinto, declining to comment on specific cuts and moves.

"This includes a programme of reductions in service and support costs across the organisation, which have been rising sharply in recent times."

Miners across the board have been cutting back as they grapple with a combination of low metals prices, weak demand and currency headwinds.

In Australia, for example, high-cost operations have found themselves under pressure and miners such as BHP Billiton and Xstrata are cutting jobs in coal mines.

Rio Tinto will also cut jobs at its Australian Coal & Allied Industries unit as it struggles with a steep drop in coal prices and a high Australian dollar.

Rio posted a 34 percent drop in first-half profit, joining major rivals Anglo-American and Xstrata in reporting earnings dented by weaker prices, mainly due to a slowdown in top consumer China, and stubbornly high costs.

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