Rio Tinto RIO.LN +0.08% PLC produced record volumes of iron ore in its fiscal first half, after expanding several vast mines in the Australian Outback even as prices of the steelmaking ingredient tumbled.
It demonstrates how Rio Tinto is deepening its reliance on a commodity used in everything from cars to apartment blocks for profit, despite concerns among some investors that global mining companies are adding new supply too quickly. Several fund managers recently cut their holdings of mining shares, including Rio Tinto's stock, on worries about a looming supply glut of iron ore that could take years to clear
On Wednesday, Rio Tinto said it produced 139.5 million metric tons of iron ore in the six months through June, up 10% from a year earlier. Its shipments rose 20% to 142.4 million tons.
"Our iron ore expansion continues to deliver high-margin growth reinforcing our position as a low cost producer," Rio Tinto Chief Executive Sam Walsh said in a stock exchange filing.
Rio Tinto is betting that Chinese iron-ore demand will remain strong, helped in part by government spending on projects that need large amounts of steel, such as subways and airports. China imported 457 million tons of iron ore in the first six months of the year, up 19% from a year earlier, according to recent customs data. China buys three in every five tons of iron ore shipped by global mining companies.
In the remote Pilbara region of Western Australia, Rio Tinto has invested billions of dollars to expand mines capable of feeding this demand. The company in June hit a target of being able to produce 290 million tons in the Pilbara on an annual basis, and plans to spend a further $2 billion (U.S.) to increase output by more than 20% within three years.
Other global mining companies, including Anglo American AAL.LN +0.83% PLC and BHP Billiton Ltd. BHP.AU +0.29% , are increasing production from Brazil to Australia, either by opening new mines or squeezing more from existing pits.
Some investors, however, are starting to question whether China's appetite for imported iron ore will weaken as Beijing seeks to remake its export-dependent economy. Pollution controls and shutting factories in sectors plagued with overcapacity already have crimped demand for other commodities such as coal.
The benchmark price of ore with 62% iron content imported through China's Tianjin port fell by nearly a third in the first six months of this year, according to data provider the Steel Index, as increases in supply starts to outpace demand. Iron ore traded at $98 a metric ton on Tuesday, after slipping as low as $89 a ton in June to its weakest level since September 2012.
In recent weeks, companies including Deutsche Bank AG DBK.XE +1.94% and Commonwealth Bank of Australia have slashed their forecasts for iron-ore prices. Morgan Stanley MS +0.60% lowered its price estimates by 21% in each of the next two years, to $90 a ton in 2015 and $87 a ton in 2016, saying it had underestimated the speed at which new mines were starting up.
Rio Tinto, which makes more than 90% of its profit from selling iron ore, says its Pilbara mines will continue to be big moneymakers even at a lower prices, with high-cost mines in China most at risk from a sustained downturn.
The company said it produced 73.1 million tons of iron ore in the three months through June, up 10% from the previous quarter when bad weather swept across the Pilbara and disrupted mining there.
Rio Tinto also reported a 23% increase in first-half copper production on the back of a stronger performance from the Kennecott mine in Utah, in which it holds a 30% stake, and the newly begun Oyu Tolgoi operation in Mongolia.
Bauxite production was 2% lower in the first half as Rio Tinto wound down production at its Gove refinery in Australia's Northern Territory. Last November, Rio Tinto said it would stop producing alumina at the unprofitable refinery, which has struggled with low prices and the strength of Australia's currency.
Source: The Wall Street Journal
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