A glut of iron ore at the same time China’s economy is contracting has increased pressure on mid-tier players and driven low cost miners such Rio Tinto and BHP Billiton to cut operating costs to maintain margins and stay ahead.
Rio Tinto CEO Sam Walsh, speaking to shareholders at the company’s annual general meeting in London, revealed just how much breathing space the weakening Australian dollar, and lower oil prices, have given the company.
Walsh said that if Rio’s 2014 average cost per tonne of $19.50 was converted to today’s exchange rate for the Australian dollar, and with lower oil prices, iron ore costs are running at around $17 a tonne.
Working on the company’s 290 million tonnes a year production run rate at its Pilbara iron ore operations which was achieved in May last year, that approximate $2.5 a tonne saving could equate to $725 million annualised saving rate. But of course, commodity prices and foreign exchange rates fluctuate so it’s not an exact science.
“We have worked hard to stay in front of the challenges associated with the market, particularly at a time of lowering iron ore prices. It is imperative that we continue to do this,” Walsh said.
“With iron ore now trading around $50/t delivered into China, we have more to do to ensure that we maintain the margin between ourselves and the high cost producers.
“Being the lowest cost producer is not about a competition, or a bid to secure bragging rights. Rather, it’s fundamental to the health of our business.”
Rio and BHP Billiton have been criticised for ramping up production, leading some – including Fortescue boss Twiggy Forrest – to accuse them of squeezing out smaller, higher cost producers.
Iron ore is down about 60% compared to 12 months ago and the fall has dragged on a number of miners, including Atlas Iron which entered a trading halt last wee, announcing it would start mothballing its mines immediately and halt exports in coming months.
“There is a lot of late entries into the market who have taken advantage of higher prices and they’re now feeling the impact of that as prices have come down. This is rational, normal economics,” Walsh said.
But he said it’s not over yet. Rio in 2015 aims to cut operating cash costs by $US750 million. Over the past two years the company has worked hard to cut costs by $US4.8 billion, halved capital expenditure to $US8.2 billion and lowered net debt almost by half to $US12.5 billion.
Keen to set Rio apart from higher cost producers, Walsh reiterated Rio was operating in the first cost quartile and said: “This is important because the margin we make is actually the gap between us and the high cost producers because iron ore prices are actually set at the marginal cost of production which is people who are in the fourth quartile.”