UPDATE 3-Rio, Fortescue drive iron ore output despite China risks

Tue Oct 16, 2012 4:57am EDT

* Rio Tinto records record Q3 iron ore output

* Keeps full-year iron ore guidance at 250 million tonnes

* Says its operations running strong in volatile market

* Smaller rival Fortescue also raises output

* China steel sector still weak, stimulus eyed

By James Regan

SYDNEY, Oct 16 (Reuters) - Rio Tinto , the world's No.2 iron ore miner, backed plans to lift production this year, saying its operations were running strong despite a volatile market caused by China's uncertain economic outlook.

The output of iron ore miners in Australia, the world's biggest exporter, is being closely watched for clues on how weaker consumption of steel in China is hitting demand for industrial commodities. Miners have in recent months been scaling back expansions and spending, raising concerns a decade-long mining boom in Australia is ending.

Given its size, Rio is one of the world's lowest cost iron ore miners, enabling it to turn a profit even when prices slide. The firm said it dug a record tonnage in the September quarter.

"Markets remain volatile, but our business is resilient and our operations are performing strongly," Chief Executive Tom Albanese said in Tuesday's quarterly activities report.

Smaller rival Fortescue Metals Group, which also runs mines in the Pilbara area of Australia's northwest, said it plans to boost output by around 20 million tonnes this year and will decide by December whether to restart work on its Kings mine, which could nearly double its output in two years.

Just last month Fortescue slammed the brakes on plans to lift its annual capacity to 155 million tonnes by digging the Kings lode, cut 1,000 jobs and increased its debt and lending facilities to more than $12 billion.

Fortescue's slowdown came as a slide in iron ore prices to under $87 a tonne coincided with a mounting debt pile.

Iron ore has since recovered to around $113 a tonne , close to the $120 level Fortescue Chief Executive Nev Power says is needed to warrant a restart of the Kings project and push ahead full steam with higher production targets.

"The price drop caught everyone by surprise because of the speed and how far the iron ore price fell," Power told reporters. "It overshot, then rebounded."

Analysts attribute the recovery to restocking of iron ore inventories by Chinese steel mills, raising doubts the higher prices can be sustained once the warehouses are replenished.

CHINA DATA

Rio Tinto's attributable September-quarter iron ore output was up 5.6 percent to 52.6 million tonnes on the same quarter a year ago. Production guidance for the full year was maintained at 250 million tonnes.

Only Brazil's Vale mines more ore.

The Australian firm derives about 80 percent of its earnings from iron ore -- the bulk sold in China -- and has committed to spending $3.7 billion towards expanding its Australian iron ore capacity by another 25 percent, calling the sector the best-returning commodities business in a tough global environment.

But the outlook is uncertain as China's annual economic growth probably slowed for a seventh straight quarter in the July-September period to the weakest since the depths of the global financial crisis, a Reuters poll showed. China releases its GDP figure on Thursday.

David Lennox, a mining and commodities analyst with Fat Prophets in Sydney, said the data could turn sentiment.

"If they are still very weak and trend is accelerating down that will not give the mining industry any heart," Lennox said.

"However, if it comes in flat with last quarter, that will give the iron ore market some heart," he said.

Official Chinese data showed that Australian miners were shipping more iron ore in the first eight months.

Between January and August, imports to China rose 20 percent to 222.7 million tonnes.

Australian miners are also benefiting from restrictions on iron ore exports from India, which is attempting to keep its own steel industry well stocked with raw materials.

BHP Billiton , the world's third-biggest iron ore producer, is expected to report solid quarterly iron ore production when it reports on Wednesday.

SEES IRON ORE PRICE RECOVERY

Fortescue's Power is predicting a recovery in iron ore prices to around $120 a tonne with a Chinese leadership transition set to be soon out of the way and as stimulus efforts generate higher demand for steel and restocking at Chinese steel mills.

November's once in a decade leadership transition in China has been adding to uncertainty in the market, with the steel sector keenly watching whether Beijing will be launching more economic stimulus and pro-growth policies.

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