Rio predicts slower demand for steel to drive down prices

Rio Tinto expects new production and slower growth in steel demand to weigh on prices of the raw material during the second half.

Rio Tinto expects new production and slower growth in steel demand to weigh on prices of the raw material during the second half.

"We're going to see downward pressure on iron ore prices in the second half and perhaps beyond," Greg Lilleyman, Rio's president of Pilbara operations in Western Australia, said at a conference in Perth. "We're going to see a number of projects bring supply on in the second half of this year around the globe - in particular, in the Pilbara."

Steel demand growth in China, the biggest importer of iron ore, has slowed from an annual growth rate of 20 per cent in 2010 to 2.1 per cent last year, Citigroup said.

The nation's new leadership is focusing on building a consumer-led economy as a construction boom wanes.

Shares in Rio, which will increase production in the Pilbara region to 360 million tonnes by the first half of 2015 from 290 million tonnes this year, fell 1.5 per cent to $58.66 at the close of trading. BHP was down 0.4 per cent.

The world's second-biggest exporter of iron ore is pursuing an "unrelenting" focus on improving shareholder value, Rio's new chief executive, Sam Walsh, said last month, after write-downs and a fall in revenue due to lower commodity prices.

Rio will seek to sell assets and cut costs after commodity prices fell. It plans to reduce capital expenditure to $13 billion this year from $17 billion last year, while targeting cost savings of more than $5 billion by the end of next year.

"In terms of new projects, if prices are lower moving forward than the period we've just come from, they're not going to be easy," Mr Lilleyman said. "The long-run story, notwithstanding the volatility we've seen, is still for relatively strong iron ore prices and demand over a long period of time."

Mark Lyons, Citigroup's head of iron ore and steel trading, said iron ore prices could average $US120 ($117) a tonne.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles