Management reshuffles and $14 billion write-downs aside, Rio Tinto (ASX, LON, NYSE:RIO) posted last week record iron ore production and shipments in 2012 from its Australian mines in the Pilbara region, home to the world’s largest known steel making material deposit.
The company, which is the second biggest miner, has decided to prioritize Pilbara capex over Simandou, its ore project in Guinea, but analysts are questioning this move.
Supporters think that with current iron prices almost doubling over the past four months, and its proximity to China, the Pilbara’s dominance seems secure in the long run. According to FT.com (subs. required), even with big ore bodies coming on stream from 2015 in Brazil (Anglo’s Minas Rio and Vale’s Serra Sul), Australia will be able to keep its crown in this commodity kingdom. Rio Tinto’s decision, for them, was the right one, as the company already has the infrastructure and distribution channels in place at home.
Critics think betting for iron ore and the Pilbara might not have been the best choice, as the surge in iron ore prices is actually hindering expansion of iron ore mines Down Under.
A case in point is Fortescue Metals (ASX:FMG), the world’s fourth-largest iron ore company. The miner, reports South China Morning Post, is planning to sell a minority stake in its port and rail unit in the Pilbara, which could be “the crucial link for at least four other companies scheduled to start or expand production – Atlas Iron, Brockman Mining, BC Iron and Flinders Mines”:
“If you look at Fortescue’s monthly cash generation at US$160 a tonne, they do not need to sell this,” said a resources banker in Australia who declined to be named as he had not spoken to Fortescue on this issue.
The iron ore price collapse last year to around US$87 a tonne left Fortescue so cash-strapped it was forced to slash 1,000 jobs, slow its expansion plans, sell some power assets and refinance US$5 billion in debt. Since then, iron prices have soared to a 15-month high of US$158 before slipping back a bit.
It was Sam Walsh, then head of Rio Tinto’s iron ore business and now the miner’s CEO, who said earlier this month he believed the current spike in the iron ore prices would be short-lived.
And the results of a Reuters’ poll release today are backing him up. The report concludes the commodity is overvalued and says the spot price will continue to slide after easing over the past week.
Analysts believe the drop will be driven by the uncertain outlook for global steel demand as China, the world’s top consumer of the material, is unlikely to be brisk given an economic recovery that could be moderate. Demand elsewhere remains uncertain, they add.
Iron ore price will continue to ride a rollercoaster this week as major producers get ready to update the market with their quarterly figures from the three months to December.
BHP (ASX, NYSE:BHP) will update the market Tuesday, while Fortescue Metals is scheduled to release its figures on Thursday.
Image by The National Archives UK