Freight Rail

Pilbara railways set to stay busy despite slowdown

Rio Tinto train - Photo Rio Tinto

Australian mining giant Rio Tinto has hinted that it has no plans to cut production in the Pilbara, despite low iron ore prices and much sound and fury from Australian politicians and smaller miners.

Iron ore rose to above the US$60 per tonne mark at the start of May, but that is still low when compared to the peaks enjoyed during the past five years.

At the company’s Perth annual meeting last week, chief executive Sam Walsh and chairman Jan Du Plessis made no apology for digging up and exporting large volumes of cheap ore, a tactic smaller miners with less cash reserves have struggled to match.

This strategy also attracted ire from Western Australia’s government, whose premier Colin Barnett has been enraged at the drop in revenue from commodities’ royalties.

Fortescue Metals Group’s Andrew “Twiggy” Forrest has also been critical of Rio and BHP Billiton, despite his own business having substantially invested in new production.

Rio recently announced first-quarter iron ore shipments of 72.5 million tonnes, up 9% from the first quarter in 2014, but down 12% compared with the 2014 December quarter.

But with iron ore trading around US$60 per tonne delivered into China, Walsh said the company must do more “to ensure that we maintain the margin between ourselves and other producers”.

“Being the lowest-cost producer is not about a competition, or a bid to secure bragging rights. Rather, it’s fundamental to the health of our business,” he said.

“The global iron ore market is in a period of transition, with high-cost and in some cases late-entrant supply being supplanted by low-cost producers.

“We have already seen the winding back of iron ore supply from Chinese producers, on top of production cuts from high-cost seaborne suppliers.”

Walsh said the company took “no comfort” in the suffering of smaller, higher-cost producers, a reference to operators such as Atlas Iron, which halted trading briefly in April, before re-opening some of its projects under new, less profitable deals with its contractors.

He did hint at some change in emphasis, notably that increased production would come from existing infrastructure rather than new projects.

“In other words, only the projects with the most attractive returns will proceed – the projects that will deliver the most additional value to shareholders.

“By way of example, this year in the Pilbara we will continue our low-capital-cost brownfield expansions as we grow our capacity.”

Fellow Pilbara mining and rail giant BHP Billiton used similar language in April, when it put on hold plans for the Inner Harbour Debottlenecking project at Port Hedland, instead talking of leveraging productivity through existing infrastructure.

“The fact our market share today of 20% is the same as it was a decade ago, invalidates suggestions that we are responsible for a perceived market dislocation,” Walsh continued.

“Over the past eight years, we have invested US$28bn in our Pilbara iron ore operations.

“I can assure you our investments… are in your interests as shareholders, and they are in Western Australia’s and Australia’s interests too.”

He described Pilbara expansion as being a “consistent strategic response to the unprecedented, continuing, long-term growth in China”.

“The world remains on a path towards greater urbanisation,” he added.

“It should be remembered that growth of just 1% per year is required for China to reach 1 billion tonnes of crude steel production by 2030.”

Chairman Jan Du Plessis talked of China experiencing slower, but still significant, economic growth.

“Let us keep in perspective that across the globe, 70 million people each year are entering the middle class,” he said.

“The Chinese economy is almost 25 times the size it was 25 years ago and over the next decade, 170m rural Chinese will move to an urban environment.”