Rio Considers Iron Ore Expansion on `Tight Market

Rio Tinto Group, the world’s second-largest iron ore exporter, is studying expanding annual production of the steelmaking ingredient by 36 percent in Western Australia, amid “tight” global supply.

Output may rise to 300 million tons from 220 million tons in 2009, Chief Executive Leigh Clifford said at a press conference in Perth, Australia. Sam Walsh, Rio’s head of iron ore, said earlier Chinese customers were calling for increased production.

Rising demand from China, the world’s biggest steel producer, has helped push contract iron ore prices to a record for five years and spurred Rio Tinto and BHP Billiton Ltd. to boost production. About 80 percent of China’s steel is made in blast furnaces, which use iron ore.

“It is too soon to call it a peak,” Walsh said in an interview at the London-based company’s shareholders meeting. “We have customers calling us to expedite our expansion beyond 220 million tons.”

Rio has announced $5 billion of expansion since 2003 to boost iron ore production in Western Australia to almost double output to 220 million tons by early 2009.

Shares in Rio Tinto fell A$2.19, or 2.6 percent, to A$82.70 at the 4:10 p.m. close in Sydney on the Australian Stock Exchange. The benchmark S&P/ASX 200 Index dropped 0.8 percent.

Spot Prices Rise

The spot price of iron ore including freight charges is trading at $25 above the record contract prices achieved this year, indicating demand is stronger than supply, Walsh said. Excluding freight, Rio’s contract iron price this year is $51.47 a ton, according to Bloomberg’s calculation.

“The market continues to be tight, and we believe it will continue for the rest of the year,” said Walsh.

China’s demand for commodities is continuing to lead global demand, and there’s “no sign of a letup,” Rio’s Chairman Paul Skinner said at the same press conference today. “That rate of growth seems to be continuing very strongly.”

With demand from Europe and U.S. doing “reasonably well,” and stocks remaining low, Rio Tinto remains “very positive this year and into the next as well,” Skinner said.

Rio gets 16 percent of sales from China, whose economy has grown at least 10 percent a year since 2003. The price of copper has risen close to last year’s record $8,800 a ton as Chinese demand for the metal jumped this year.

“I have to say that demand is as strong as it has ever been, for iron ore in particular,” said Clifford. “When you step back to January, copper was at $2.50 a pound and some were saying the end is nigh. It was $3.50 yesterday. We are flat-out producing.”

Port Congestion

Port congestion at Newcastle in New South Wales in Australia, and Dalrymple Bay in Queensland, which is curbing coal exports from the country is a “real disgrace,” said Clifford.

Both ports had record queues of ships lining up to load coal as expansion hasn’t taken place fast enough and the overturning of a queue management system. That’s led to higher costs and slowing exports.

Rio remains on the lookout for mergers, acquisitions and ventures, said Skinner today, without providing details.

The company will return spare cash to shareholders if it can’t find investment targets, he said. Rio is spending $3 billion buying back stock, which it expects to complete by the end of this year.

Rio posted a 43 percent increase in 2006 profit to a record $7.44 billion, as Chinese demand drove up prices of copper and iron ore. The Asian nation is the world’s largest consumer of coal, steel, iron ore, copper, aluminum and zinc.

Information from: www.bloomberg.com