Rio warns on China, reviews asset sale timeline

SYDNEY (Reuters) - Global miner Rio Tinto (RIO.L) warned on Wednesday of slowing Chinese demand for commodities because of the global financial crisis, and signaled a possible delay in plans to sell $10 billion in assets.

Rio (RIO.AX), which had promised to sell non-core assets this year to pay back debt, also reported a 30 percent slide in July-September refined copper production.

Lower ore grades cut its share of copper production by 28 percent at the giant Escondida mine in Chile, a partnership with BHP Billiton Ltd/Plc (BHP.AX)(BLT.L).

Chief Executive Tom Albanese said the global financial crisis had not swayed his opposition to BHP's hostile all-share takeover offer for Rio, which the drop in share markets has halved in value to around $82 billion.

"We continue to be very comfortable with our position," Albanese told reporters on a conference call.

The warning over China is the first by a major raw materials supplier that the Chinese commodities boom is losing punch.

"In the near term, the Chinese economy is pausing for breath. China is not completely insulated from an OECD recession and we will see an impact on Chinese exports," Albanese said, adding any upturn in China's net demand would not occur before 2009.

Rio and other big mining houses have increasingly turned to China to sell millions of tonnes of metals and ores to feed rapid industrialization as more traditional markets softened. China accounted for 18 percent of Rio's sales last year.

Traders said Rio's comments helped push mining shares lower amid heightened gloom about a global recession. Rio's London shares tumbled 17 percent to 2,350 pence by 10:15 a.m. EDT, largely in line with the UK mining index .FTNMX1770.

READY BUYER

Rio has allocated billions of dollars in the last few years to expand its mines on the promise China would remain a ready buyer for years to come.

For a related graphic, see here

"Quite clearly, Rio Tinto are now acknowledging with everyone else that any improvement in demand will be delayed," said FW Holst analyst Rob Craigie.

Albanese said suppliers with higher costs than Rio were the most at risk in the current environment, but Rio, too, was looking at the viability of maintaining higher cost operations, particularly in aluminum, which could lead to production cuts.

The chief executive of Rio's Alcan, Dick Evans, told Reuters the unit planned minor production cutbacks at two or three higher-cost smelters and was hunting for takeovers of firms hit by market turmoil.

Third-quarter aluminum production from the combined Rio Tinto and Alcan businesses fell 1 percent, mainly due to curtailments in New Zealand and Britain, while bauxite output rose 11 percent and alumina 2 percent.

Even before the world tumbled deeper into financial trouble, signs were mounting the China-led commodities boom was fading.

Analysts have dramatically cut, or in the case of Goldman Sachs JBWere, eliminated any expectation of higher iron ore prices next year due to reductions in Chinese steelmaking. Since July, copper and nickel prices have dropped around 40 percent, while zinc is off 27 percent.

Aluminum Corp of China Ltd (Chalco) (2600.HK) (601600.SS) (ACH.N), the world's No.3 alumina producer, is temporarily shutting around 1 million tonnes of capacity due to low prices, a company source said on Wednesday. Other high-cost alumina producers have also closed capacity.

SALE REVIEW

Rio said its financial position remained strong in the face of a waning Chinese market and its overall outlook was positive.

Still, given challenging financial markets, it was reviewing its timeline for the first $10 billion in promised divestments -- sales aimed at helping Rio recoup some of the $39 billion it paid for aluminum group Alcan in 2007.

In total, Rio has earmarked about $15 billion in sales tied to the Alcan purchase, mostly in packaging, engineering and exploration.

"They're just waiting so they can get the best value they possibly can out of those assets, instead of selling them into a very depressed market," said James Wilson, a mining analyst with DJ Carmichael & Co.

Chief Financial Officer Guy Elliott said Rio was able to service its debt, which stood at $42 billion at end June, despite the sales deferrals.

($1=A$1.43)

(Additional reporting by Sonali Paul in MELBOURNE, and Eric Onstad in LONDON; Editing by Ian Geoghegan/Richard Hubbard)