Rio Tinto: Commodity demand to double

Demand for iron ore, copper and aluminium will double in the next 15 to 20 years, Rio Tinto chief executive Tom Albanese said on Tuesday.

The massive increase in demand will be driven by BRIC economies, he said during an investor seminar.

Made up of Brazil, Russia, India and China, the BRIC economies now include SA under the new acronym BRICS.

In a twist of fortunes, these emerging economies last week indicated they were willing to come to the aid of heavily indebted European Union countries.

“We are living in very interesting times defined by the race to change and the ability to adapt to it,” Albanese said.

The doubling in demand for these commodities will require ‘an unprecedented supply response’.

But he said with the current financial market jitters keeping project finance tight, there was a limit to the supply-side response. Muted supply will keep prices high, he said.

“We are realistic about what is going on in the world and we expect some uncertainty,” he cautioned. While the group's order books were full and prices remained buoyant, customer sentiment was now more cautious and physical markets were softer than they were six months ago.

“We've been saying for quite some time that we expected to see patterns of increased price volatility amid turbulent financial markets and that scenario is playing out,” said Albanese.

He said a lot of people were examining the start of the 2008 crisis to find clues to the next possible downturn. Commodities were, however, a lagging indicator of the crisis. But he remained optimistic about the outlook for commodities on the other side of the latest financial storm.

“As we look through the current storms, our long-term view on demand remains unchanged,” he said.

And Rio Tinto has positioned itself to take advantage of this demand, particularly from China.

The group has US$27 billion worth of major capital projects underway and a US$35 billion pipeline of unapproved projects currently in the advanced-study phase.

Growth projects are also balanced between brownfield expansion of existing assets such as iron ore in the Pilbara and newer, world-class quality projects including copper-gold in Mongolia and coal in Mozambique.

Also addressing investors, Rio Tinto CEO of Energy Doug Richie echoed emerging coal miner Coal of Africa's (CZA) CEO John Wallington's prediction that Southern Africa's coking coal potential stands to rival that of Australia.

It is envisaged that Southern Africa - taking in the deposits in Mozambique, SA and Zimbabwe - has the potential to export more than 50 million tons of coking coal a year, which at current prices of from US$250/t to US$300/t would generate proceeds at the levels of US$12 billion to US$15 billion a year.

But Richie believed export from regional mines could reach up to 100 million tons a year.

His excitement over the potential in Mozambique, one of the world's largest untapped coking coal resources, was evidence that the group's recent acquisition of Riversdale could be game changer for its coal business.

Rio Tinto gained control of Australian-listed Riversdale after making a US$4 billion takeover offer for the company.

Besides Mozambique, Riversdale owns the Zululand Anthracite Colliery, which has an operating underground mine in the Zululand coalfield of northern KwaZulu-Natal.

Richie confirmed that the Riversdale-inherited Benga project in Mozambique was due to start exporting coal later this year.

Construction of Stage 1, which will facilitate a run-of-mine production of 5.3 million tonnes a year, has commenced and is expected to be completed in the second half of 2011.

The project, which is expected to be expanded to a 20 million tonne run-of-mine operation, is a joint venture between Riversdale, which holds a 65% stake, and Tata Steel, with a 35%.

Richie said the Mozambican assets were ideally located to major growth markets including India and Brazil.

The group is also accelerating expansion in Australia and is neatening up its portfolio with the privatisation of its Coal& Allied business.

Production from Australian coal operations are expected to expand by around 50% by 2015 to around 73 million tonnes combined with a strategic objective to grow the Mozambique assets to 25 million tonnes per annum of coking coal by 2020.

Besides coal, Rio Tinto is aiming for growth across its portfolio with iron ore also expected to grow by 50% in the five years to 2015.

Rio Tinto CFO Guy Elliott said the company was also in the enviable position of being able to make strategic acquisitions should they arise.

“It's possible that assets not ordinarily available might become onto the market at this time,” Elliott said, referring to the potential of a double dip.

Rio Tinto's estimated net debt as at end August was US$7.6 billion, a reduction of US$1 billion in two months.

This has been achieved despite the accelerated share buyback programme, which has seen more than US$4 billion of Rio Tinto's US$7 billion share buy-back programme being completed.

Elliott said the strength of the group's balance sheet quips it for the volatility ahead.

He said a phased approach to growth allows it to invest in a risked-managed way.

With the bulk of the still-to-be-approved projects being second or third phase expansions to existing assets, these could be delayed if market conditions deteriorate rapidly.

While growing core assets and keeping an eye out for targeted merger and acquisition opportunities, the group has not stopped reviewing its suite of assets.

It recently announced its intention to divest from SA's Palabora Mining.

Rio Tinto has an effective interest of 57.7% in Palabora and it, along with Anglo American (AGL), which holds 16.8% of the copper producer, said it was selling because the asset was ‘no longer of sufficient scale’ to fit with its strategy.

Elliott said there were also some aluminium assets that were no longer considered core.

Bemoaning the challenges facing the industry, Elliott said a key headwind was the rise of resource nationalism.

He said countries were increasingly turning to minders to bolster their coffers.

Australia has just this week released a second draft of its proposed minerals resource rent tax. Elliott said many countries fail to take into account the contribution being made by resources groups and the impact these taxes could have on future investment.

“Last year Rio Tinto paid US$7.4 billion in taxes of all kinds,” Elliott said.

He said these taxes fail to take into account the cyclical nature of the sector and only serve to alienate investors. - I-Net Bridge