Rio Tinto banking on China rebound as profits drop 34%

Giant miner Rio Tinto (LON:RIO) is closing down its Blair Athol coal mine in Australia as the company considers whether to limit spending on new projects next year, after reporting a 34% fall in underlying profits for the first half of 2012 to $5.2 billion.

The world’s second-largest iron ore producer, however, stuck to its $16 billion spending budget anticipating a quick recovery in the Chinese economy later this year that should stimulate demand for iron ore.

The decision comes a week after competitor BHP Billiton (ASX,LON,NYSE:BHP) said it would be cutting back on its $80 billion worth of capital expenditure it had earmarked up until 2015 while Xstrata reduced spending this year by $1 billion on Tuesday.

The Anglo-Australian miner said sharp drops in iron ore prices and a $989 million deferred tax asset following the introduction of the Minerals Resource Rent Tax in Australia ended up taking a toll on its results.

Increased operating costs and lower production output were the other major contributors, said the company.

Prices for the steel-making commodity have plunged this year from the highs of 2011, with prices dropping to two-and-a-half year lows.

Chinese import rates  – the country is responsible for consuming 60% of the world's iron – are now the lowest since December 2009, according to data provided by Steelindex.

Rio Tinto is not alone with its dismal Q2 report. Vale (NYSE:VALE), the world's largest producer of iron ore, reported its worst second quarter since 2007 in July, blaming slowing steel demand.