March 30, 2012 / 3:25 PM / in 6 years

Vale, Rio execs say orders books full; supply constrained

NEW YORK (Reuters) - Rio Tinto (RIO.AX) (RIO.L) and Vale VALE5.SA executives said their order books were full and showing no signs of easing, but supply will increasingly struggle to keep up with demand.

In interviews this week at the Reuters Global Metals and Mining Summit, chief financial officers of both mining giants said demand for their ores and metals was robust, and expected to stay that way for the long run even in the face of a soft landing in China’s economy.

“I don’t think we have a problem with orders in any area, certainly not in copper,” Rio Tinto Chief Financial Officer Guy Elliott said.

Aluminum prices present the biggest challenge, with high stock levels and over capacity, he said, but added, “orders are still there for aluminum.”

Cuts in some of the 5.7 million metric tons of annual capacity in China that were expected have not yet materialized, he said.

Vale Chief Financial Officer Tito Martins said demand for nickel, copper and iron ore in the first three months of the year was higher than last year.

“We have not seen any change in the last two months. Demand has been stronger than it was in the last quarter of 2011,” he said. “Every iron ore ship loaded in Brazil has been sold either in the Western world or the Eastern world.”

With Asian and especially Chinese demand for metals projected to stay strong for years to come, the executives said prices had seen a structural shift to higher levels that should likewise hold up for years.

“We are confident we will not see prices in the ranges they were in 10 years ago. There was a shift in the market. Demand changed the structure of the market. And we believe that along the next years we will see prices in the new range,” said Martins.

Citing examples in both nickel and iron ore markets that effectively hold prices above specific levels, he said buyers fail to materialize below $16,000 a metric ton where Chinese nickel-pig-iron producers lose money. In iron ore, many marginal producers struggle below $100 to $120 a metric ton.

Though not the same as steel, he said, the copper market shares many of the same strong demand factors that should keep prices of both metals buoyed.

For example, China’s steel consumption rose 40 percent in just the last five years. Rio Tinto thinks around 100 million metric tons a year of new iron ore will be needed over the next 7 years, of which 500 million will go to meet estimated demand growth and 200 million to replace existing high-cost supply in countries like China.

“So that means a lot more supply is needed in this market,” Elliot said.

To electrify an increasingly urbanized China and India, the miner expects 6.5 million metric tons of new mined copper will be needed by 2018.

“It’s not fanciful to suggest that we might see something like a doubling of demand over something like a 20-year period for many of our products,” said Elliot.

For the near term, neither company sees a hard landing for the Chinese economy.

    “Our view is clearly that there will be a soft landing in China. An interesting piece of evidence is our order book for iron ore and the spot price of iron ore. Those two things have remained in very good shape in recent weeks,” he said.

    Rio sees a 2012 growth pace in China of 8 percent or more.

    Vale is also confident that China will stay strong in 2012.

    “Despite what some people are saying about the Chinese market, we don’t have any reason to believe the situation has changed,” said Martins, adding that a growth rate of 7 percent over the next 10 years would equate to an additional $4 trillion in GDP, he sad.

    While demand seems secure, not only in China but elsewhere, Elliott said supply is the bigger concern.

    “The fact is, we’re seeing quite significant delays amongst producers as they try to cope with the challenges of tighter credit availability, getting approvals needed to get a mine up and running, shortage of skills in the industry and longer lead times on items you need to complete a project,” said Elliott.

    Major Drilling Group International Inc (MDI.TO) Chief Executive Francis McGuire, who expects record revenues this year as producers scramble to try to fill the supply gap, captured the problem among the top miners he supplies.

    “I think the view of our customers is, as long as there continues to be growth in Asia, it doesn’t particularly matter if it’s at 9 or 7 or 5 percent. That is still a tremendous amount of metric tons and they don’t know where they will find them for that 2018-to-2020 horizon.”

    Follow Reuters Summits on Twitter @Reuters_Summits

    Reporting by Carole Vaporean

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