February 13, 2014 / 9:01 AM / 4 years ago

Rio Tinto sees silver lining in China's bid to cut steel output

SYDNEY, Feb 13 (Reuters) - Global miner Rio Tinto’s iron ore business is getting a boost from China’s moves to modernize its steel industry to cut down on pollution, its chief executive said on Thursday.

Steelmakers in China face a spate of mill closures this year as Beijing steps up its efforts to become more environmentally friendly, prompting some fears of a steep fall in prices for raw material iron ore.

Goldman Sachs has forecast prices sinking to $80 a tonne by 2015 from around $120 at present.

Rio Tinto chief executive Sam Walsh dismissed the concerns, saying the changes were generating greater demand for the higher quality ores his company mines in Australia’s Pilbara region.

“As China focuses on improving environmental performance, we’ll see the steel mills move to higher quality iron ore,” Walsh said after the company reported a $3.1 billion profit for 2013. “That’s where our product is focused.”

Walsh said Rio Tinto’s iron ore output would reach a capacity level of 290 million tonnes a year before the end of the first half of 2014.

Iron ore made up nearly 90 percent of Rio Tinto’s earnings in 2013.

Rio Tinto introduced its so-called Pilbara Blend ores in 2007 in order to capture more of the market for material that can be directly fed into steel furnaces, reducing costs and improving energy efficiencies

“We are at the higher level,” Walsh said. “Pilbara Blend is the largest product that is sold into the steel market. We are in a prize position.”

Moody’s Investor Services has estimated that a Chinese government target to lower steel capacity by more than 80 million tonnes is equivalent to reducing domestic production by 11 percent from 2012.

Moody’s said modern Chinese steel producers such as Baoshan Iron & Steel would benefit the most from any shake-out in the sector.

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