UPDATE: Rio Sees Good Demand, But Economy To Remain Volatile

14th Jul 2010 08:53

(Adds chief executive's and analysts' comments on production and demand outlook, quarterly pricing, Cape Lambert port expansion) By David Fickling Of DOW JONES NEWSWIRES SYDNEY (Dow Jones)--The global economy is heading for a fresh bout of uncertainty amidst fears of a double-dip recession in developed countries and a slowdown in China, Rio Tinto Ltd.'s (RIO.AU) chief executive Tom Albanese said Wednesday. But the head of the world's second-largest miner said that the year would "shape up well" for Rio, and that full-year guidance for iron ore production was unchanged at 234 million tons. "Markets for most of our products are strong and the overall long-term demand outlook is positive," Albanese said in a statement released with the company's second-quarter production report. "But in recent weeks fears about a possible double-dip recession in OECD countries and a slight slowdown in Chinese growth have led to some weakening in sentiment," he said, referring to the Organization for Economic Cooperation and Development. "We believe this pattern of volatility in the global economy is set to continue." Production of iron ore, the principal commodity for Rio, fell 2% from a year earlier to 43.6 million metric tons in the three months to the end of June, the company said, but moves towards a more responsive pricing system continued apace. Around 50% of Asian customers were now pricing the commodity on a quarterly basis, and the remainder were using the same mechanism on a provisional basis, Rio said. The holdouts--still insisting on annual pricing--are believed to be mostly Chinese steelmakers. Rio's rivals BHP Billiton Ltd. (BHP.AU) and Vale S.A. (VALE) in March moved their iron ore contracts with Japanese steelmakers to quarterly prices based on average spot market prices, as opposed to the previous system where the first major producer-consumer deal struck acted as an annual benchmark. Glyn Lawcock, a mining analyst at UBS, said the move towards index-based pricing could be "more a negative than a positive" for Rio in an environment of falling prices. The Metal Bulletin iron ore index has slipped from a peak of US$181.78 a metric ton on April 22 to US$116.89 on Tuesday. "Those people who are provisionally priced could jump straight to spot prices" and enjoy a price cut, Lawcock said. "Having said that, if they do that, Rio have already said it's a one-way journey and they'll never come back from spot." Rio's shares were little changed on the report. Having closed at A$66.55 Tuesday, the stock moved down to A$67.43 a share just before the release of the report and drifted to A$67.38 at 0700 GMT, 83 cents up. Paul Young, an analyst at Deutsche Bank in Sydney, said the report contained few surprises: "It's pretty much a copy-and-paste job." Full-year iron ore production guidance was unchanged at 234 million tons, while the mined copper target was revised up 10,000 tons to 690,000 tons and refined copper was level at 380,000 tons. Forecast alumina production was down slightly at 9.4 million tons from 9.6 million tons, while aluminum was down to 3.7 million tons from 3.8 million tons. Rio saw "improving market demand" for the two materials, although low rain and snowfall levels in the Saquenay region of Quebec would cut power generation, hurting energy-hungry smelters in the region and trimming US$100 million from earnings before interest, tax, depreciation and amortisation in the second half of the year. In a separate announcement earlier in the day, Rio said it had received approval for US$200 million of funding for dredging operations to expand Cape Lambert, an iron ore port in the eastern Pilbara in the north of Western Australia. Production from Rio's Pilbara iron ore operations hit 219 million tons in the year to the end of June, close to current capacity, Rio said. With the Cape Lambert investment, capacity would rise to 330 million tons per year by the first half of 2016. Combined with BHP Billiton, Rio controls around 70% of the seaborne trade in iron ore. Amongst other commodities, Rio said hard coking coal production in the quarter to June grew 26% on the same period last year to 2.4 million tons, while U.S. coal production was down 47% at 11.1 million tons and bauxite rose 10% to 7.9 million tons. Drops in production of copper and gold from the quarter last year of 19% and 34%, respectively, were attributed to lower ore grades at the Kennecott Utah Copper and Grasberg mines. -By David Fickling, Dow Jones Newswires; +61 2 8272 4689; [email protected] (END) Dow Jones Newswires July 14, 2010 03:53 ET (07:53 GMT)