Rio’s Bullish Iron Ore Outlook Bolsters Glencore Case for Bid

By David Stringer  Oct 9, 2014
Bloomberg
Rio Tinto Group (RIO) today looked through a market downturn to present a bullish outlook for global iron ore demand, underscoring the attraction of its biggest earner to spurned suitor Glencore Plc. (GLEN)

The owner of the world’s most profitable iron ore business sees future demand for the steelmaking material in China supported by manufactured goods as its economy transitions from infrastructure-led growth.

“Complementing the Chinese growth, we also expect the markets in India, the Middle East” and Southeast Asia to develop, Andrew Harding, chief executive officer of Rio’s iron ore unit, told reporters today on a conference call.

Rio this week said its board had unanimously rejected a July approach from Glencore to create a $162 billion mining behemoth. A 40 percent decline in iron ore prices this year gave Glencore Chief Executive Officer Ivan Glasenberg the chance to go after a cheaper Rio and make it part of a diversified portfolio.

“We remain very confident on the prospects for our iron ore business, given the healthy demand outlook, our low cost of production and the high quality of our product,” said Harding, who declined to comment on the Glencore bid.

Rio is pressing ahead with expanding its output to a planned 360 million metric tons a year by 2017, while Glasenberg has taken issue with the major producers for oversupplying the market.

Infrastructure expansions to raise output, including port and wharf work, is about three-quarters complete, Rio said today in a presentation.

Cut Costs

The producer intends to continue to cut costs to maintain its status as the cheapest producer of iron ore, Harding said. The company relies on the product for almost 90 percent of its profit.

Any move to cut output amid faltering prices would simply encourage competitors to expand production, said Harding. “Curtailing production would simply create a void that would be filled by other producers and new starters,” he said.

“Our analysis indicates there are 32 competitive projects that could be incentivized if we were to withhold volume.”

China’s crude steel production may reach 1 billion tons a year by 2030, while iron ore demand will be spurred by urbanization in emerging economies that are home to about 80 percent of the world’s population, Rio said in the presentation.

Glencore is now barred, in most circumstances, from making a renewed bid for six months under the U.K. takeover code.

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