Rio Tinto banks on mainland's steel usage

PUBLISHED : Saturday, 27 November, 2010, 12:00am
UPDATED : Saturday, 27 November, 2010, 12:00am

Global miner Rio Tinto has placed a bold bet that Chinese steel demand will remain buoyant for years by pledging to almost triple its spending on new projects.

Ahead of an investor presentation in London, chief executive Tom Albanese revealed Rio would invest US$11 billion in its mines next year, up from US$4 billion this year. Much of that cash will be pumped into Rio's iron ore mines. By 2015, it plans to produce 333 million tonnes of the steelmaking material annually from its deposits in Pilbara, western Australia, up from 210 tonnes this year.

The Anglo-Australian mining giant is not the only commodities producer banking on ever-increasing Chinese steel consumption.

Fortescue Metals Group, the Australian miner, wants to almost quadruple its annual iron ore output to 155 million tonnes, from 42 million tonnes in 2009-10, and will spend US$8.4 billion next year on the aggressive expansion plan.

The miners' optimism flies in the face of some economists' forecasts that mainland growth is on a long-term downward trend.

But in comments emailed to the South China Morning Post yesterday, Albanese argued the different pace of development among the cities meant that the mainland's industrialisation had a long way to go.

'China is not one homogenous mass,' the Rio boss said. He said Beijing's attempts to move development inland from export-driven coastal cities including Beijing, Shanghai and Tianjin would sustain demand. 'Steel consumption in other provinces, some with populations of 90 to 100 million apiece, in China's interior and more distant provinces, is still some way behind [coastal areas].'

Diana Choyleva, a Hong Kong-based economist at Lombard Street Research, wrote on November 16 that China's growth rate could average out at just 5 per cent a year over the next decade. She said China, in the face of sluggish global growth and stiff opposition from Western governments, could not continue on its development path of cheap exports and an undervalued currency, and would struggle to convince its thrifty citizens to spend more.

But such comments were not visibly worrying Rio, which was 'clearly assuming that demand will stay strong for the foreseeable future and that prices will remain up as well', said Charles Kernot, of London stockbroker Evolution Securities.

Sign of confidence

Rio Tinto is to raise its investment in its mines from US$4 billion this year to this amount next year: $11b