China's iron ore demand will remain strong: Rio boss Sam...

China's iron ore demand will remain strong: Rio boss Sam Walsh
ANDREW BURRELL AND PAUL GARVEY THE AUSTRALIAN DECEMBER 21, 2013 1

Rio Tinto chief executive Sam Walsh says many mining analysts had misunderstood the fundamentals of the iron ore market during the past year.

RIO Tinto chief executive Sam Walsh says erroneous forecasts that iron ore prices would slump to $US90 a tonne or lower this year showed that many analysts failed to grasp that Chinese domestic supply was drying up and that new projects were difficult to develop.

In an interview yesterday with The Weekend Australian in Rio's Perth offices, Mr Walsh said he expected iron ore prices would be softer next year as some new supply entered the market, but he believed Chinese demand would remain strong.

Iron ore prices have been remarkably strong in the second half of 2013, remaining above $US130 a tonne and defying analysts' almost unanimous forecasts of drastic price falls. Earlier this year, analysts had been forecasting the average iron ore price to fall as low as $US90 a tonne by the December quarter, in what would have been a big blow to company profits and state and federal government coffers.

The average analyst estimate, according to Bloomberg data, has since been increased to $US125 a tonne but is still short of the present benchmark iron ore price of $US132.70. Analysts are forecasting iron ore price to average $US119 a tonne next year, gradually declining to $US100 a tonne in 2017.

Mr Walsh refused to provide his own estimate for next year. Last month Rio said it would spend up to $US8 billion ($9bn) expanding its iron ore mines in Western Australia, in a further sign that it believes prices will remain high.

Mr Walsh pointed to a "rather bold" prediction in October by UBS, which wrongly forecast that prices for the key steel ingredient would fall as low as $US70 within weeks because of an expected seasonal drop-off in steel production in China.

The investment bank said the price slump would be brief and retained a full-year average forecast of $US120 a tonne.

Mr Walsh said many mining analysts had misunderstood the fundamentals of the iron ore market during the past year.

"They misread what was happening in the market: that (Chinese) domestic supply is getting harder and harder as their ore bodies deteriorate, their mines get deeper and their costs are going up," he said.

"The Chinese are actually finding it harder to keep up their share of the market, so they've had to rely on increased imports.

Plus the fact that you've seen steel (demand) continue to grow. "The other factor is that of all the (new) projects that people talked up in terms of coming on, only about one-third of those actually came on. They are much harder than people think they are. I read somewhere that 400 million tonnes (are) coming on in the next few years (but) the track record is just not there."

Mr Walsh, who has been in the top job for 11 months after spending eight years running Rio's iron ore operations, said he was optimistic about the long-term market for iron ore and other commodities in Rio's portfolio, mainly because of forecast growth in developing countries.

"Everyone is focused on China for now (but) behind that will be Indonesia, the Asian nations, the former Soviet Union, the Middle East, South America and Africa," he said.

"All of this is going to go through the same industrialisation and urbanisation process, and that's going to need the fundamentals that we supply."

But Mr Walsh admitted the likelihood that China would accumulate growing stocks of scrap metal represented a future threat to Rio's iron ore exports.

Scrap metal, a potentially cleaner and cheaper steel ingredient than iron ore, is expected to become increasingly abundant in China over the next 10 years as buildings, cars, fridges and other steel-intensive items developed in the past decade reach the end of their lives.

Mr Walsh said the rising use of scrap metal would be tempered by increased iron ore demand in other Asian economies with rising steel production in Japan, Korea, and Indonesia.