Rio Tinto plan may trigger steep fall in iron ore prices

Coal loading operations proceed at Coal and Allied's Mount Thorley Warkworth mine in the Hunter Valley about 140 kms (87 miles) north of Sydney in this October 18, 2010 file handout photo. [Photo/Agencies]

Iron ore prices may see sharp declines next year as global output surges on the back of Rio Tinto Plc's plan to boost production at its mines, analysts said on Thursday.

"Iron ore output may reach its peak next year as several large mines are expected to start production. The resultant overcapacity will drive down prices," said Liu Zhiqiang, a senior analyst at Sublime China Information Group Co, a commodities consultancy.

Iron ore prices have already fallen to about $55 per metric ton in the past few months and squeezed profit margins for the top global exporters - Rio Tinto, BHP Billiton Ltd, Vale SA and Fortescue Metals Group Ltd.

Liu said prices may fall below $40 next year and remain in the range of $35 to $45 because of shrinking demand and oversupply.

Despite sluggish demand from China, the world's largest iron ore consumer, and falling commodity prices, most of the major miners like Rio Tinto have showed no inclination to scale down production.

Ren Binyan, managing director of Rio Tinto China, told reporters in Beijing on Wednesday that the company is aiming to have an iron ore capacity of more than 300 million tons by the end of this year.

"It is a decision we made five years ago," he said. "Even though iron ore prices have declined sharply, it is still a profitable business due to our effective cost management."

The Anglo-Australian company produced about 120 million tons of iron ore during the first six months of this year, a 13 percent increase over the same period last year.

The company's revenue shrank to $18 billion during the period, while net earnings fell by about 80 percent.

Wei Zengmin, an analyst from steel information provider Mysteel.com, said Rio Tinto's lower profit was mainly due to falling coal prices in the first half rather than iron ore.

"In the past few weeks, due to expectations of more investment in infrastructure construction during the second half, iron ore prices have started firming up," he said.

In fact, iron ore prices are still higher than the company's production costs, said Wei. Due to the prevailing low prices of iron ore, mining giants such as Rio Tinto and BHP Billiton would increasingly expand their capacity to raise efficiency and counter competition, he said.

"None of these miners will reduce their production levels, because they have to maintain their export quotas," he said. "But they will face tough challenges in the next few years due to the challenging economic outlook."