Rio Tinto still upbeat on China

Rio Tinto is bullish about China’s steel demand - and it’s also optimistic about copper use in the world’s biggest consumer.

Singapore - Rio Tinto Group isn’t just bullish about China’s steel demand, it’s also upbeat about copper use in the world’s biggest consumer.

Signs of improvement in China’s property market are boosting prospects for the metal, Jean-Sebastien Jacques, head of Rio’s copper and coal operations, said in an interview in Singapore. The government will also implement more stimulus measures if the world’s second-largest economy slows too much, he said.

Rio’s optimism stands out amid views from Glencore that mining companies were wrong-footed on a slowdown in China, with demand getting tough to call. The country’s grappling with overcapacity, a downturn in property investment and a volatile stock market that threaten Premier Li Keqiang’s growth target of about 7 percent for this year. Rio has a direct insight into the Chinese market through its Oyu Tolgoi operations in Mongolia, located north of the Chinese border, Jacques said.

“Pretty often people use copper as a proxy of the health of the Chinese economy,” Jacques said on Monday. “When I look at the order books that we have, we have no issues whatsoever in placing the products out of Mongolia being sold into China. That gives us confidence there’s demand for our product.”

Concern that a weaker China will undermine demand and exacerbate supply gluts are hurting miners’ profits and shares. Shares in Rio fell 13 percent in Sydney this year, while BHP Billiton Ltd, the world’s largest mining company, lost 11 percent. Glencore’s stock tumbled 56 percent in London. Copper plunged 18 percent in 2015 and is near a six-year low.

China stimulus

The Chinese government, which is trying to rebalance the $10 trillion economy toward consumer-led growth, is rolling out its biggest stimulus effort since the 2008 global financial crisis in a bid to put a floor under a weakening economy. Interest rates have been cut, banks are being encouraged to lend and new infrastructure spending is being rolled out.

“If the Chinese government comes to the conclusion they need to have some kind of stimulus package, they will do it,” Jacques said. “So are we confident in China’s recovery? The answer is yes. Are we going to go back to where we used to be, I think unlikely.”

The copper market will be in a surplus for the next two to three years so prices will be volatile, according to Jacques. With supply disruptions this year set to outpace those in 2014, the market isn’t far from being balanced, he said, speaking before Glencore announced output cuts on Monday.

Production cuts

Glencore has suspended copper production for 18 months from its Katanga operation in the Democratic Republic of Congo and its Mopani project in Zambia. This will remove about 400 000 metric tons of cathode from the market, the Swiss commodity producer and trader said.

Even as mining companies confront a China-led slowdown in commodities demand, Rio has been relatively insulated by lower costs. Producers worldwide have stepped up efforts to cut costs, aided by cheaper energy prices and depreciating local currencies, Jacques said. The London-based company had cost savings of $641 million in the first half and plans to increase that to $1 billion for the full year.

“The best strategy we have in the short term is to be low cost, as low cost as we can,” Jacques said. “So whatever prices are in the marketplace, we will generate cash and create value for our shareholders.”

Rio maintained its optimistic outlook for steel production in China into the next decade at an investor briefing on September 3, just a week after rival BHP trimmed its forecast by as much as 15 percent. Chinese crude-steel output will reach about 1 billion tons by 2030, the company said.

* With assistance from David Stringer in Melbourne

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