trending Market Intelligence /marketintelligence/en/news-insights/trending/XDYYKNSpGQhSPtst6qWTTQ2 content esgSubNav
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Contact Us
In This List

Rio Tinto braces for more volatility amid Asia growth hopes

Industry Top Trends 2021: Metals and Mining

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

Essential Metals & Mining Insights - August 2020


Rio Tinto braces for more volatility amid Asia growth hopes

Rio Tinto is bracing for more iron ore price volatility but believes, with BHP Billiton Group, that China's One Belt One Road initiative will drive huge demand for decades to come, amid slowing demand growth from the Asian giant.

Rio supply chain and services managing director Ivan Vella told attendees at the Global Iron Ore & Steel Forecast Conference on March 21 that the company was "optimistic" about the medium to longer-term but sees some slowdown and adjustment in China, especially in demand growth in the construction, infrastructure and automotive sectors.

He said Belt and Road would create further opportunities for growth in infrastructure and construction, but "ultimately we see continued volatility."

"That's been a constant over the last three to four years, and we've made continuing progress managing our costs and business accordingly, but we still there's a lot to do to build a resilient, strong business to deal with that volatility," he added.

Vella noted that 2017 saw very strong steel margins, peaking well above US$500 per tonne, and they remained at that level for most of the second part of the year, comparing favorably with an extended period of profitability in 2015 and 2016, and they remain well above the US$20 to US$25 per tonne margins that the Chinese mills have typically considered attractive.

This has resulted in a preference from Rio's customers to target productivity within their blast furnaces, which translated into strong demand for the company's higher-grade product, and a widening between the 58% and 62% grades — a trend reiterated throughout the conference.

That strong demand and focus on costs has resulted in a strong Pilbara underlying FOB EBITDA margin for Rio, which increased to 68% from 62% in 2016.

However, Vella said Rio could "never become complacent. We need to continually challenge and improve the capacity."

Citigroup Asia commodities analyst Tracy Liao told the conference that the group forecasts iron ore to average about US$66 per tonne this year before falling to around US$60 next year and stabilizing to US$55 US$60 over the next two years.

She said Citigroup's bearish view stemmed from the scrap availability.

"We're getting a higher than expected return [and] increasing availability coming out of China as it enters deeply into its industrialization phase, which will enable more substitution to occur, i.e. less pig iron being consumed," Liao said.

"Chinese mills are also incentivized to add more scrap base production lines to fulfill some of the environmental regulations, and with spot being spot being more competitive there should be more electric furnaces and converters being built."

"In that case we do foresee iron ore being structurally challenged, however for this year we still foresee range-bound markets perhaps a seasonal low, whereas Q2 could go slightly higher before retracements."

BHP iron ore asset president Edgar Basto said at the conference that his company's long-term positive view of the iron ore and steel markets remain broadly unchanged since the conference last year, though raw material demand growth from China, whose strong growth since the early 2000s supercharged Western Australia's economy, is set to moderate "from high places."

While BHP expects growth by 2026 to nearly halve from the last decade, from 3.1% CAGR to 1.7%, other emerging nations in South and Southeast Asia are expected to drive demand for steel in coming decades, as population growth and living standards rise across the region.

"These, coupled with China's continued pursuit of the Belt and Road Initiative, will enable the economic take-off from those emerging markets," Basto told delegates.

He said BHP's current analysis suggests that One Belt One Road would drive steel demand in over 68 countries, bringing US$1.3 trillion in infrastructure investment in the region.

While BHP estimates an additional 150 million tonnes of steel demand, placing China in a prime position as supplier, the initiative also incentivizes the rapid development of new local steel making capacities.

Basto noted that about 20 million tonnes per annum of blast furnace capacity that has been initiated or built in Asia alone, which would be reflected in higher quality, was also driven by China's steel industry reform — and the country's steel industry posted the highest profit margins in a decade in 2017.