Rio Expects Commodity Price Swings as Markets Consider Economic Prospects

By Angus Whitley - Dec 4, 2011 8:00 PM GMT+0700

Rio Tinto Group (RIO), the world’s third- largest mining company, said metal prices will fluctuate further as markets weigh economic prospects for next year amid concern Europe’s debt crisis will derail a global recovery.

“We should expect more of these gyrations of all of our prices as we move forward to 2012,” Tom Albanese, chief executive officer of the London-based company, said yesterday on the Australian Broadcasting Corp.’s “Inside Business” program. “The markets are trying to react and anticipate to what they think the economy is going to look like next year.”

Commodities are set for a “difficult environment” in 2012, according to UBS AG, citing a possible dissolution of the European Union and a “hard landing” in China, the biggest raw- materials consumer. The worsening debt crisis in Europe has prompted a slump in equities and commodities, including iron ore and copper prices, and cuts to global growth forecasts.

“The entire market is very skittish and that’s reflected in equities and commodities,” said Colin Whitehead, a Sydney- based analyst at equity researcher Fat Prophets. “We’re in a volatile world and the main one for Rio is iron ore. How things play out in the U.S. and Europe is a large part of it.”

Rio has dropped 25 percent this year in London trading, cutting the company’s market value to 67 billion pounds ($105 billion). The benchmark FTSE 100 index has lost 5.9 percent in the same period.

Metal Slump

Metal prices in London have slumped 17 percent this half, while iron ore prices have rebounded after tumbling 31 percent in October to below $120 a metric ton, the biggest loss since at least 2008. A slowing global economy and stronger dollar will limit potential for gains by commodities next year, Morgan Stanley said last month.

“I don’t think this volatility is going to go away,” Albanese told “Inside Business.” The company will have to run a business with large capital projects in an “environment, which is realistically going to have higher levels of volatility than we would have assumed a couple of years ago,” he said.

The International Monetary Fund will probably lower its global growth forecasts next month as the European debt crisis rocks financial markets and slows output, a spokesman said last week. The IMF in September cut its forecast for global growth to 4 percent this year and the same amount for 2012. Still, the S&P 500 has rebounded more than 13 percent from its 2011 low on Oct. 3 after improving U.S. economic data.

Iron Ore Expansion

Rio last week said it expects to increase capital spending 17 percent next year and raised its iron ore expansion target, bolstered by the company’s confidence in long-term demand. Iron- ore usage in China, the biggest buyer of the steelmaking ingredient, will double by 2020 from 2008, according to Rio.

Increased costs of building and expanding iron ore mines made it harder for rivals to enter the industry, Albanese said in the interview. Iron ore prices won’t drop below $120 a ton next year, Vale SA, the world’s largest exporter said last month.

Rio’s iron ore operations in Australia’s Pilbara region are “designed to operate well and stay profitable in the $120 range,” Albanese said. “The floor price will be progressively dropping” as large expansions are developed in the next several years, he said.

“The one thing I am concerned about is that our cost pressures in the Pilbara, our cost pressures in Australia, are quite a bit higher than anywhere else in the world,” he said.

More Output

The company boosted its production expansion capacity target for its Australian operations by 20 million tons a year to 353 million tons and set a longer-term target of 450 million tons.

“We would like that business to go to 450 or more, but all the other pieces have to be in place,” he said.

Rio is set to win a bidding war for Canadian uranium producer Hathor Exploration Ltd. after Cameco Corp. said last week it won’t raise its hostile bid a second time to surpass a C$654 million ($647 million) friendly offer from Rio.

Concern that demand for nuclear power will slow has increased since March 11, when an earthquake and tsunami wrecked Tokyo Electric Power Co.’s Fukushima Dai-Ichi power station. That triggered the worst atomic disaster since Chernobyl in 1986 and prompted some nations to put nuclear plans on hold.

Hathor, which controls the Roughrider uranium deposit, will become a “significant” producer in coming years, Albanese said, though he ruled out such a contribution in the “near term.”

“In the post-2020 period there will be a strong need for uranium for that nuclear sector,” Albanese said. “What we’re going to see increasingly in the next several years is that the Chinese will continue to take a bigger and bigger part of the global nuclear picture and they’re going to need the uranium.”

To contact the reporter on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net