Rio Tinto vows to not cut copper output despite falling prices
Jean-Sebastien Jacques, head of copper and coal at Rio, said the Anglo-Australian mining group would not reduce output even though current prices of the industrial metal did not reflect “fundamentals”.
His comments come just days after rival commodities group Glencore said it would slash its zinc output by a third after the price of the industrial metal fell to a five-year low on concerns about slowing economic growth in China.
Rio and its peer BHP Billiton have been ramping up production of their main commodities during the current price rout, betting that their low-cost assets will enable them to survive and maintain market share while higher-cost producers go bust.
While copper prices have been slumping, Rio has been spending billions of dollars expanding output at its giant copper project in Mongolia, and is preparing a second underground phase of the mine.
“Why should I make cuts?” Mr Jacques said, in an interview ahead of LME Week, the biggest annual gathering of the metals and mining industry.
“If you have marginal assets and marginal projects and you have a pretty weak balance sheet I think you may be in trouble pretty soon,” he said.
Copper, seen by many as a barometer of the state of the global economy because of its use in wiring and electronics, has dropped 20 per cent this year on concerns of weak demand from China. The country accounts for about 40 per cent of global consumption of the metal.
Its fall has been one of the main reasons behind the sharp decline in mining shares this year. Glencore’s stock price is down 55 per cent in 2015.
In response miners have been curtailing output and slashing spending. Glencore has announced plans to cut 400,000 tonnes of copper production at mines in the Democratic Republic of Congo and Zambia. Closures and cutbacks have also been announced at mines controlled by Freeport-McMoRan, Asarco and Ok Tedi.
Mr Jacques said concerns about China were overblown and the government would do whatever it took to handle the transition to a consumer-led economy. He said the second half of the year was shaping up to be better than the first half.
“Am I worried too much about China? No I’m not,” Mr Jacques said. “When we look at the order books that we have today, do we have any issue in placing product in China? The answer is no.”
Rio has a direct insight into the Chinese market through its Oyu Tolgoi mine in the Gobi desert, which supplies smelters in China with copper concentrate. The company makes about 20 per cent of earnings from the metal, its second most important commodity.
Nevertheless, Mr Jacques said copper prices were unlikely to recover in the near term because hedge funds were using the commodity as a way to place bearish bets on China. Prices would also be volatile, he said.
“When the supply balance changes, that’s when the market will move back to being traded on fundamentals and that’s when the price will be in the right place,” Mr Jacques said.
That could start to happen next year on anticipation of a deficit — when demand exceeds supply — in 2017, he said. Further out, Rio sees a deficit of between 6m to 8m tonnes of copper by 2025.
Mr Jacques declined to comment on reports that Rio could sell the company’s coal assets in Australia to former Xstrata head Mick Davis. However, he acknowledged that a reshuffle of assets, including the sale of a stake in a New South Wales coal mine, could pave the way for further divestments.
Coal has become much more marginal for Rio since a big fall in prices that started in 2011. This year it folded its coal operations into its copper division in a step that was widely seen as signalling a reduced focus on the fossil fuel.
By Henry Sanderson and Neil Hume