Rio Tinto sees lucrative opportunity in China’s steel capacity cuts

15 May 2017

The head of mining behemoth Rio Tinto does not feel that China’s continuing fight against overcapacity in its steel sector would hurt the company’s business in that country.

In an interview to China Daily, Chief Executive Officer Jean-Sebastien Jacques welcomed China’s growing concern about inefficiency in the steel manufacturing industry. “Instead, the move represents a good opportunity for us as steel plants resort to utilizing high-quality assets and higher-quality raw materials,” said Jacques, head of the world’s second-biggest miner. “I’m optimistic about Rio Tinto’s business in China and if you ask me if I am worried about China in 2017, the answer is definitely no,” he added.

With substantial overcapacity in its iron and steel sector, China has vowed to continue with its reduction this year, aiming to cut 50 million metric tons of steel production and analysts believe the initiative will reduce iron demand in the world’s second-biggest economy.“The overcapacity cuts mostly aim at scrapping polluting and less efficient plant, which will drive efficient producers to demand high quality minerals and resources such as iron ore, bauxite and copper that we produce,” Jacques said.

The key market for Rio in China is still the steel industry. Rio believes that China trying to restructure their steel industry on the back of pollution and inefficiency issues doesn’t mean they will reduce the steel output.

China might shut down the smaller, less-efficient, more-polluting blast furnaces, but at the same time they will refocus all their production on the newest, largest blast furnaces. This, Jacques believes, could be a very good piece of news, and lots of opportunities for the mining giant. “In order for them to produce exactly the same output, they will have to buy higher quality raw material and that’s a great piece of news for us,” he said.

Rio Tinto’s strategy in China is to build business around a set of tier one assets and the group is taking a value over volume approach.

The mining giant has been supplying the minerals and metals including iron ore, bauxite, copper, diamonds, coal and borates to China for over a century.

“Over the next 15 years, the world is expected to consume more copper than in the past 20 years, almost as much steel as in the past 30 years and almost as much aluminum as in the past 40 years. So we remain very much focused on the bigger picture,” Jacques said, downplaying China’s transitory production cuts.

Jaques is also bullish about China’s focus on infrastructure, particularly the One Belt One Road Initiative. Infrastructure including roads, rail lines, transport links and power generation are the key to supporting global growth and can unleash economic growth by creating jobs, increasing investment and enhancing productivity. “China’s infrastructure boom provides lessons for the rest of the world,” the CEO said.

“At Rio Tinto, our business sees the potential from a greater focus on infrastructure through the Belt and Road. We are pioneers in mining and metals, and produce materials essential to human progress which are also needed for the rollout of the Belt and Road through infrastructure.

According to the CEO, globalisation has been a significant driver of growth for Rio Tinto. “We have witnessed first-hand the benefits globalization can bring as we were the first company to sign a joint venture and work with China to develop iron ore deposits in Australia. That joint venture, called Channar, is now celebrating 30 years of operations.” At the time it was China’s largest and most successful overseas investment. Today China is Australia’s and Rio Tinto’s major trading partner.

China is Rio Tinto’s largest customer responsible for about 43 per cent of its sales revenue in 2016. In the past 10 years, Rio Tinto has purchased about $7 billion in goods and services from China for use in its operations worldwide.

Source-www.indoasiancommodities.com