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Rio, Fortescue cut iron ore output as China weakens
11.19.2008 | -- 1
SYDNEY (Reuters) - Rio Tinto Ltd/Plc (RIO.AX: Quote, Profile, Research), the world's No. 2 iron ore miner, will slash output by as much as a third for the rest of this year, joining its Brazilian rival in trying to stem a fall in prices as Chinese steel demand slumps.
With the onset of a likely global recession cutting deep into steel use around the world, miners including Rio and Brazil's Vale (VALE5.SA: Quote, Profile, Research)(RIO.N: Quote, Profile, Research) have committed to cutting output by as much as 52 million tonnes, or about 6 percent of globally traded supply.
It remains to be seen whether those curbs will be enough to halt a collapse in benchmark Chinese spot iron ore prices, which have fallen from a record high of $197.50 a tonne in March to $63.50 last week, according to data from the Metal Bulletin trade journal. Spot prices have fallen below annual contract prices for the first time in years.
"There's more pain to come," said Australia & New Zealand Bank chief commodities strategist Mark Pervan. "China's largest iron ore port normally receives 10 vessels a week and they are currently receiving only four." 
Rio said on Monday that it would cut its calendar-year production target to between 170 million and 175 million tonnes, a roughly 10 percent reduction from its previous target of 190 million tonnes.
"Operations continue to perform well but demand has continued to decelerate," Rio's chief executive, Tom Albanese, said in a statement.
With Rio having already mined 139 million tonnes in the first part of the year, its cuts will have to be even deeper in the fourth quarter. On a daily basis, Rio would have to cut output by 25 to 35 percent during the quarter to hit its lowered target, according to Reuters calculations based on its production rates.
Bigger rival Vale announced a 30 million-tonne cut last month, leaving only BHP Billiton Ltd/Plc (BHP.AX: Quote, Profile, Research)(BLT.L: Quote, Profile, Research) operating at full speed. BHP spokesman Peter Ogden said the company had no plans to cut output, but analysts said it was more a matter of when, not if, the firm would follow suit.
"If the demand across the steel industry landscape is as we see it, you'd imagine BHP can't stay unaffected," said Ken West, a partner at fund manager Perennial Growth.
Fortescue Metals Group Ltd (FMG.AX: Quote, Profile, Research) also announced on Monday it would bring forward maintenance work at port and processing facilities in Australia amid the slow-down in demand, cutting output by about 10 percent from the 22 million tonnes it had hoped to ship by Dec. 31.
Rio shares rose 5.7 percent to A$78.00. BHP, targeting Rio in an unsolicited share offer, climbed 7 percent to A$29.89 in step with an overall stronger stock market.
Rio was one of the mining sectors' loudest voices predicting a "stronger for longer" commodities boom on the back of a modern-day industrial revolution that is now slowing down.
To support its growth projections, Rio this year announced multi-billion-dollar expansion plans to take capacity to 220 million tonnes a year, and 320 million tonnes by 2012.
"We believe this will be a short sharp slowdown in China, with demand rebounding over the course of 2009 as the fundamentals of Chinese economic growth remain sound," Albanese said.
A $600-billion stimulus package announced by China on Sunday to fund major infrastructure works and keep as much financial malaise as possible away from its shores, could reignite steel demand next year, though analysts could not say by how much.
"A lot of that funding is going to go to new construction and that will require a lot more steel, but how that translates into iron ore sales next year is yet to be seen," said DJ Carmichael & Co analyst James Wilson.
China approved 4 trillion yuan ($586 billion) in new government spending between now and 2010, focused largely on infrastructure and social projects.
Steel prices have collapsed in recent months along with demand as the global financial crisis strangled growth prospects and developed economies faced what some say could be their first full-year recession since World War II.
Even with BHP maintaining production, Australian and Brazilian shipments to China are seen down 20-25 percent in November and December, according to Australia's Macquarie Bank.
"Despite recent production cuts, steel mill inventories remain under pressure as end-user demand has collapsed," Macquarie said in a report on Monday.
China's mills are expected to churn out about 500 million tonnes of steel this year, short of earlier forecasts of 520-550 million tonnes, according to recent statements by the China Iron and Steel Association.
Chinese hot-rolled steel coil prices are down nearly 30 percent from a month ago at around $595 a tonne, while steel billets also have dropped sharply, according to steel traders.
(Additional reporting by Sonali Paul; Editing by Clarence Fernandez)
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