iron shortage looms article

Iron shortage looms with Rio tipped to delay plans
by: MATT CHAMBERS From: The Australian July 12, 2013


RIO Tinto appears increasingly likely to delay a $5.4 billion iron ore mine expansion in Western Australia, possibly leaving global iron ore markets under-supplied and backing up claims by new Arrium chief Andrew Roberts that pundits predicting price slumps are factoring in too much new supply.
After a detailed review of Rio's plans to ramp up the final 70 million tonnes of annual iron ore production in its expansion plans, JPMorgan has predicted the miner will delay its iron ore ramp-up by three years from its current 2016 target. Rio has started building the port and rail capacity but not yet committed to mine expansion.

Like all big miners, Rio is reining in spending and costs amid a lower demand and price outlook, and has said it has options for mine expansion beyond its original plan to quickly build bigger mines to serve its infrastructure expansion from 290 million tonnes a year to 360 million.

"The decision to add 70 million tonnes a year of mine capacity appears to be taking longer than previously outlined by the company, suggesting Rio may be pursuing a go-slow option," JPMorgan analyst Lyndon Fagan said in the report.

..."On this basis, medium-term physical markets may be tighter than most investors anticipate; our revised Rio projections would result in global iron ore moving into deficit in 2016."

The report follows signals from Rio chief Sam Walsh in May that Rio had options to delay reaching its production target of 360 million tonnes a year until 2018.

It also comes after the axing of about 50 middle management positions at iron ore's Perth headquarters by new iron ore chief Andrew Harding.

Slowing down the mine expansion by trying to get more out of other mines and de-bottlenecking infrastructure would also reduce the $US5bn ($5.4bn) cost.

The JPMorgan view supports claims by Mr Roberts that analysts expecting a dramatic fall in iron ore supply are too pessimistic. "Some commentators are very bearish on iron ore . . . we're not," Arrium chief Andrew Roberts said yesterday after a speech to a Melbourne Mining Club lunch, his first public outing in his new position. The company formerly known as OneSteel, which is planning to expand its South Australian iron ore mines to be able to export 12 million tonnes of iron ore a year, is highly leveraged to prices of the steelmaking raw material, meaning downbeat views of prices are weighing on its stock.

"There is continued strong growth in China, and while longer-term growth rates are expected to subside, this would still leave demand for iron ore at high levels," Mr Roberts said in his presentation.

He said some forecasters believed capacity growth would outstrip demand in the next few years but that this did not give enough weight to the potential for projects to be delayed, export restrictions in India and closure of high-cost iron ore production in China could buoy prices.

"Historically, people have generally underestimated demand growth and overestimated the rate of supply coming on," he said.

Mr Roberts this month took over from former Arrium chief Geoff Plummer, who eased OneSteel's dependence on its Whyalla steelworks by diversifying into iron ore exports and ball bearings used to grind ore in mining plants.

The new chief said Arrium was likely to benefit from the sliding dollar, with every 1c fall against the US currency translating to between $10 and $12 million of earnings before interest, tax, depreciation and amortisation.

But he said this would not show up in earnings until next financial year and that offsetting the falling dollar was a gloomy demand outlook for Whyalla's long steel products, which are used in construction and infrastructure projects.

He said the company's grinding ball business expansion plan was not affected by falling copper and gold prices because the projects in South America were lower cost and were still going ahead.