STILL DIGGING IT
Multinational miner Rio Tinto has felt the pinch from slowing demand in China, but it maintains an optimistic long-term outlook while it works on becoming greener and more efficient.
Amid the ongoing slowdown in China’s demand for commodities, multinational businesses such as Rio Tinto are pinning their hopes on the rise of other countries located along the “New Silk Road”.
“There will be many things happening, be it the New Silk Road or other countries,” said Sam Walsh, the chief executive officer of the world’s second-biggest mining company, when asked about the future of his company and the metals and mining industry overall.
China’s ambitious plans for what it calls “One Belt, One Road” through a host of countries to increase trade and investment are moving ahead, notably in the likes of Pakistan and Kazakhstan. Whether this development will result in new activity and new demand for commodities, helping to offset the decline in China, remains to be seen.
In the last four years, world iron ore prices alone have dropped 75% as growth in China’s steel industry slowed, forcing miners to lower costs.
The broader slowdown in China has had a domino effect across the region and the world. The impact has been more severe companies that were heavily reliant on exports of commodities to feed the needs of China and have started to see their earnings drop. Rio Tinto has been no exception.
The British-Australian multinational reported a net profit of US$806 million in the six months to June 30, down 82% from a year earlier. Underlying earnings, which strip out the impact of one-off impairments, fell 43% to $2.9 billion. While the figures might look grim, they were in line with or slightly above most analysts’ forecasts.
And since all miners have been facing the same weak conditions, the continuing shakeout in the industry will be good for companies such as Rio Tinto which have the resources to weather the downturn.
Iron ore accounts for 72% of Rio Tinto’s overall net earnings, and Mr Walsh predicted earlier this year that about 120 million tonnes of unprofitable mining capacity would close this year, with 80 million tonnes coming from high-cost operators in China.
“In terms of supply and demand, we are really seeing that the market has reached some sort of equilibrium,” he said.
China’s steel production, a key measure of iron ore demand, has been lower this year than the year before, but Mr Walsh is still expecting substantial long-term growth, with a better focus on productivity and cost control.
Industrial production in China has been growing at its slowest pace since 2008, prompting Chinese authorities to loosen monetary and fiscal policies in an attempt to encourage new activity.
Gross domestic product (GDP) in the world’s second-largest economy expanded just 6.9% in the third quarter of this year and analysts expect full-year growth to be the slowest since 1990. China’s top leaders have stated that they are willing to accept growth as low as 6.5% in the longer term is it is more sustainable and broader based. Analysts agree that expansion below 7% will be the New Normal.
In any case, the numbers being bandied about don’t bother Mr Walsh very much.
“China’s slowdown will be a gradual one but on a much larger base. Even now, if you look at today’s growth rate and you go back five years, the current growth is equivalent to 10% growth in those days,” he said in reference to the double-digit growth the country had witnessed for decades before single-digit growth became the norm.
His company’s assessment of economic activity in China, he said, was that even with 7% growth for the foreseeable future, there would be continued steady demand for commodities.
“Sooner or later the prices of commodities will rise,” he predicted.
“Rio Tinto has become profitable but we are in a cyclical business and we go through cycles,” he added, saying that in a business where companies cannot control the prices, their aim should be to look at the long-term prospects.
He noted that growing infrastructure demand in China and other emerging markets was likely to buoy demand for metals. Steel consumption is projected to grow 40% in the next 15 years, while aluminium consumption is also expected to expand 40% over the coming decade.
But while the world awaits the rise of the countries along the New Silk Road, Mr Walsh says Rio Tinto has been adapting to the new world order in other ways. For one thing, it is becoming greener and is looking at more innovations to lower greenhouse gas emissions.
Innovation, he said, was the only way that companies such as his would be able to achieve environmental goals and also lower costs to become more profitable.
Addressing the Nikkei Global Management Forum recently in Tokyo, Mr Walsh said Rio Tinto was looking at ways to improve technology to gain an edge over cost. It has been using data to analyse its operations around the globe and is looking at various ways to adopt the latest innovations from various sectors to maximise efficiency. This, he said, had helped save billions of dollars in “wasteful working capital”.
“Over the next 50 years, coal will continue to be in use. We have high-quality coal, but what we have been doing is that we have been reducing greenhouse gases by 20% and it is a sign to the world that we want to be part of the solution to this issue rather than part of the problem,” he said.
Commenting on the broader outlook, Mr Walsh said the mining industry was ripe for consolidation and many companies including his were in a good financial position to take opportunities to expand through acquisitions.
“We are in a good position to acquire assets,” he said, adding that he was open to buying any of the major competitors the company has at the moment.
Even selling assets — Rio Tinto has dozens of mining and processing operations all over the world — is also something that no responsible executive can ever rule out, he added.
“There has been a lot of speculation and what I want to say is that if there is anyone who can offer a value that is more than what we value the asset, whatever the asset is, then we are all open and I represent the shareholders and that is my duty,” he said.
“We have done that in the past and we can do it in the future.”
“China’s slowdown will be a gradual one but on a much larger base. Even now, if you look at today’s growth rate and you go back five years, the current growth is equivalent to 10% growth in those days”
SAM WALSH CEO, Rio Tinto