The Rising Influence of Rising Affluence

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Rio Tinto Reports 4Q09 Results

[See #msg-43960884 for a related story. Rio’s full financial report is at: http://www.riotinto.com/documents/Media/PR784g_Fourth_quarter_2009_operations_review.pdf .]

http://online.wsj.com/article/SB20001424052748704281204575002554256730156.html

›Strong Demand From Chinese Steel Manufacturers Is Expected to Contribute to a Price Increase This Year

By ALEX WILSON
JANUARY 15, 2010

MELBOURNE, Australia—Rio Tinto posted strong quarterly production figures Thursday, beating the company's guidance for iron-ore output and fueling expectations of a sharp price increase with its bullish comments on Chinese demand.

Rio Tinto's 2009 iron-ore production rose 12% from a year earlier to 171.5 million metric tons from 153.4 million tons, and its fourth-quarter production rose 49% to 47.2 million tons.

The miner said its global iron-ore output for the year was more than 217 million metric tons, beating guidance given in October for full-year output of between 210 million and 215 million tons.

[The two paragraphs above require clarification insofar as iron-ore production is reported in two ways. The higher set of figures (217M tonnes for the 2009 calendar year and 61M tonnes for 4Q09) refer to Rio’s actual mining output. The lower set of figures (172M tonnes for 2009 and 47M tones for 4Q09) refer to Rio’s share of the output after deducting minority interests.]

"This was another very strong quarter for iron-ore production, driven by continuing high demand from China," Chief Executive Tom Albanese said.

Mr. Albanese's comments will reinforce increasing confidence in Chinese demand for the key steelmaking ingredient, which has seen analysts revising their forecasts higher for contract prices this year.

Macquarie analyst Brendan Harris said the fact that spot iron-ore prices have been soaring at the same time big producers are increasing sales points to strong demand and bodes well for higher contract prices [duh].

"It shows how tight the market is, given that the sales volumes are as strong as they are, but markets are still holding up incredibly well," he said.

Most analysts have been expecting an increase of between 20% and 30% in benchmark iron-ore prices in this year's round of annual negotiations between miners and steelmakers. But with spot prices now about 80% above last year's benchmark, analysts see upside, with Merrill Lynch raising its forecast to a 50% increase from its previous estimate of 15%.

The brightening outlook for iron ore is good news for Rio, which leaned heavily on the commodity and derived 76% of its underlying first-half earnings from iron ore as lower prices affected its other divisions.

The sharp downturn in metals prices sparked by the global financial crisis prompted Rio to make deep cuts to its aluminum production, and Mr. Albanese said the company is maintaining those reductions despite the recent rally in prices.

"We are seeing recovery across most of our key commodities, although we continue to be cautious on the state of the global economy going into 2010 as stimulus packages start to wind down," he said.

Rio's shares rose 2.6% to 79.15 Australian dollars (US$73.16) after trading as high as A$79.45. IG Markets institutional dealer Chris Weston said the solid result would support the stock but might not be enough to spark a rally, given that much of the upside from higher iron-ore earnings was already priced in.‹