May 7, 2015 / 2:36 AM / 4 years ago

Rio Tinto unshakeable on iron ore expansion plans

PERTH/LONDON (Reuters) - Rio Tinto is to stick with plans to produce iron ore at full tilt despite a plunge in prices, turning up the heat on rivals large and small, which are struggling to cope with the consequences of a supply glut.

A Rio Tinto logo is displayed on the front of a wall panel during a news conference in Sydney November 29, 2012. REUTERS/Tim Wimborne

While rivals BHP Billiton and Brazil’s Vale have applied the brakes to their medium term output plans, Rio said on Thursday it would focus on cutting costs so it remains the world’s most profitable producer, keeping its forecast that China’s steel demand will grow towards 1 billion tonnes a year.

“With iron ore now trading around $60 a tonne delivered into China, we have more to do to ensure that we maintain the margin between ourselves and other producers,” Chief Executive Sam Walsh said at the global miner’s Australian annual meeting.

Rio Tinto, the world’s second biggest iron ore producer, and rivals Vale and BHP ramped up output just as demand growth slowed in major customer China, leading to a 55 percent fall in prices since the start of last year that has threatened the survival of smaller producers.

Rio can continue to produce profitably with iron ore prices around $30 per tonne, but a growing number of rivals are suffering. Minnows like Atlas Iron and BCI Iron are most at risk if iron ore prices remain close to current levels for long.

If prices fall further, as analysts expect, even some large producers will become loss-making.

“Of the major producers Fortescue is the one that might be forced to shut down eventually because it has a lot of debt,” Liberum analyst Richard Knights said. “It is a standalone entity rather than part of a diversified portfolio and it produces, on the whole, lower grade iron ore. But prices will need to drop significantly for that to happen.”

Other large producers such as Anglo American’s Kumba and Minas Rio and Rio Tinto’s own Iron Ore of Canada are also vulnerable, currently trading near breakeven, according to analysts.

Rio expects to ship 350 million tonnes of the steel-making ingredient this year, up from 300 in 2014, including material from stockpiles.

The company is about to complete an expansion to handle 360 million tonnes a year, but only expects to reach production capacity of 350 million tonnes by 2017. Over the past 18 months Rio has three times put off plans to build a $1 billion new mine that would boost output further, Walsh said.

The miner’s $28 billion investment in Australian iron ore over the past eight years has been based on its long-held forecast that demand for steel in China would grow to 1 billion tonnes around 2025, matching an estimate from BHP Billiton.

The forecasts have come under fire from economists and former BHP executives and contradict the view of China’s steel industry association which says demand has peaked at around 820 million tonnes.

“We continue to believe that the long run peak steel demand of China has a long way to go to approximately the billion number,” du Plessis told shareholders. “It’s a serious conclusion we came to after long debate.”

The company shrugged off attacks from smaller rival Fortescue Metals Group, which has criticized Rio Tinto and BHP for hurting smaller miners and the Australian economy.

“We have absolutely no desire to push competitors out of the business,” du Plessis said, adding that Rio’s global iron ore market share has remained at 20 percent over the past decade.

Reporting by Morag MacKinnon in Perth, Sonali Paul in Melbourne and Silvia Antonioli in London.; Editing by Richard Pullin and Jane Merriman

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