Rio Tinto Says China Is Showing Growing Appetite for Iron Ore
(AFR) — Australia’s biggest trading partner is rebounding quickly from its encounter with the coronavirus and showing a strong appetite for Australian iron ore, says Rio Tinto iron ore boss Chris Salisbury.
In a positive sign for Australia’s most lucrative export industries, Salisbury said a worrying surge in Chinese steel stockpiles during February had started to recede, suggesting the Chinese construction sector was emerging from hibernation and demand for Australian commodities would hold firm.
“We are very pleased in the way China has come back so fast. They had their own challenges associated with the virus and the slowing of their economy, but what we saw right through that period was iron ore demand did not change,” he told Perth radio station 6PR on Tuesday.
“The downstream industries did slow or shut and we saw steel stockpiles start to rise dramatically, which was a concern, but I am pleased to say that since China has returned to work, we are now seeing steel stockpiles falling, our order books are full, we have ships off the coast waiting to be loaded so our business continues to operate more or less unaffected.”
The comments support economic data published by China last week, which suggested the economy had rebounded to growth in March after contracting in February.
Rival iron ore miner Fortescue Metals Group had predicted in February that the key indicator for iron ore demand this year would come in April and May when Chinese construction activity traditionally increased.
UBS analysts said the Chinese steel sector was more focused on the country’s domestic steel demand than the more export-oriented steelmakers in Japan, Korea and Taiwan, and therefore would be as affected by slowing economies in Europe and the US.
“We think that the fundamentals for iron ore and coking coal are more exposed to a China on the mend, not to mention the already tight fundamentals and also supply-side complications out of South Africa, Canada and Brazil,” said the analysts.
Unlike prices for copper, zinc and aluminum, prices for iron ore have been resilient through the pandemic. The benchmark price was steady at $83.30 a ton on Tuesday.
That resilience is partly owing to weak iron ore supply from Brazil and cyclone disruptions in Western Australia in February.
Rio’s ports and mines were hardest hit by that cyclone, but port data published by UBS last week suggested Fortescue was largely unaffected and was on track to beat its guidance and ship a record 177 million tons in the year to June 30.
Big falls in the Australian dollar and oil prices over the past three months have dramatically lowered the cost of wages and transport for Australian miners, who are tipped to export A$101 billion ($62.2 billion) worth of iron ore in the year to June 30.
If Fortescue exports are in line with UBS estimates, the miner’s profits are also likely to reach a record high in fiscal 2020.
“The major [miners] with iron ore exposure should continue to pay healthy dividends, with yields well above those offered in other sectors and above that of the ASX 100 on average,” said Macquarie analysts in a note
While the economies of Japan, Taiwan and Korea have not rebounded as quickly as China’s, Salisbury said the prospect of more economic stimulus in China was the most important thing for Rio, given that more than 70% of its iron ore was sold to Chinese mills.
“The rest of the Asian economy is not travelling that well, but the Chinese economy seems to be recovering and of course that is the main point for our business. China is also launching stimulus programs so by the end of the year we could see some upside in terms of steel demand and therefore iron ore demand,” he said.
Rio has better insights into China than most ASX listed companies, given its biggest shareholder is a Chinese state-owned entity and it sourced 51.3% of its total revenue from China in 2019.
Japanese customers provided 8.9% of Rio’s revenue and the rest of Asia provided 10.6%.
Iron ore is Australia’s most lucrative export industry and Rio ships more Australian iron ore than any other company.
This story was originally published by Australian Financial Review
Contact editor Yang Ge (firstname.lastname@example.org)
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