Rio Tinto will ‘thrive’ despite falling iron ore prices

RIO Tinto chairman Jan du Plessis says falling prices are hurting rival producers but increased market volatility will actually help the mining giant thrive.

Iron ore being railed out of iron knob

RIO Tinto chairman Jan du Plessis says falling commodity prices are placing rival producers under “significant distress” but increased market volatility will actually help the mining giant thrive.

“It is clear that in the short term we will continue to face challenging commodity markets as economic and geopolitical uncertainty continues,” Mr du Plessis told the company’s annual general meeting in London.

“(But) at a time of significant distress for late entrant and high cost producers Rio Tinto is in a position of strength.

“In times of increased market volatility, investors seek strength, reliability and consistency and, in such times, Rio Tinto thrives.” Mr Du Plessis noted that over the past year there had been significant falls in the prices of key commodities as diverse as iron ore, copper, coal and oil.

“There is no doubt that it has been a year that saw some exceptional challenges,” he said.

But the chairman stressed China was experiencing slower “but still significant economic growth” and, globally, 70 million people each year were entering the middle class.

They will all need resources was the message he delivered to shareholders.

The credit ratings of Rio and fellow giant BHP Billiton are set to be cut by agency Standard & Poor’s after a steady plunge in iron ore prices.

The federal budget is expected to suffer a $30 billion revenue writedown over the next four years because of the iron ore price drop.

Treasurer Joe Hockey earlier this week said the federal government was contemplating a fall to $US35 a tonne. MORE jcd/jel

At BHP’s London AGM in late October, chief executive Andrew Mackenzie said West Australian Premier Colin Barnett was “completely wrong” in suggesting BHP and Rio were flooding the iron ore market and potentially squeezing out smaller players.

WA Premier Colin Barnett and Rio Tinto CEO Sam Walsh with a Rough Scaled Python during a visit to the Kimberley. Photo: Colin Murty

“We are behaving as a rationale economic enterprise,” he said.

Rio’s iron ore operations in Australia in 2014 expanded to 290 million tonnes.

CEO Sam Walsh told the London AGM on Thursday that with ore now worth $50 per tonne delivered into China the company had to maintain the margin between itself and high-cost producers.

“Being the lowest-cost producer is not about a competition or a bid to secure bragging rights,” he said. “It’s fundamental to the health of our business.”

Mr Walsh said high-cost iron ore supply was being supplanted globally by low-cost production.

“We have already seen the winding back of iron ore supply from Chinese producers on top of production cuts from high-cost seaborne suppliers,” he said.

“Major industry shifts of this nature never take place in a smooth and uniform manner, so we can expect continued bumps before the market settles.”

But he insisted focusing on cash and tightening capital allocation meant Rio had a balance sheet few could match.

BNP chief Asia economist Richard Iley argued this week that the outlook for Chinese demand “is skewed heavily to the downside”.

He believes the mining giants will remain profitable despite iron ore’s price fall and actually enjoy more market power as other players fail and the Australian dollar falls.

Originally published as Rio Tinto will ‘thrive’ despite falling iron ore prices