Rio fixes production. But price worries remain.

Rio Tinto has its production problems in hand. Now all it has to worry about is whether all that increased supply will depress prices.

Rio Tinto has allayed the worst fears of its detractors.

The production figures released this afternoon point to an overwhelmingly upbeat future. After endless problems with the weather, mining operations and overpaying for assets, Rio Tinto has proven itself capable of surmounting its operational issues.

But production is only one part of the pricing equation. And for investors, the major concern overhanging Australia’s resource industry is the demand side and in particular the economic health of China.

Neither has it escaped the attention of analysts and investors, that with higher production and promises of further massive lifts in supply – just as demand appears to be easing – the pressure on raw materials prices will only increase in the next few years.

After lagging the market for most of the day, Rio Tinto shares edged into positive territory immediately after the quarterly production numbers were released.

Iron ore production rose 7% year on year and 8% in the quarter to new records, easily beating analyst expectations after the weather affected output in the previous quarter.  

There were serious improvements in the copper division as well. Despite a series of mishaps, including a mine slide at Bingham Canyon, copper output lifted substantially. More importantly, the report indicates the company is dealing effectively with the issues.

The investment phase of the resources boom has delivered a colossal lift in capacity and output to Australian mining. A significant portion of that investment was predicated on prices remaining at elevated levels for decades to come.

The assumption was that China’s demand would lift indefinitely and that increased supply was required to meet that insatiable demand. While Chinese demand for raw materials will remain substantial, the uncertainty is whether it will plateau or even slip.

The surge in supply in the next few years will result in a shake-out among producers. As prices drop, only the lowest cost operators will survive.