Rise of the robots

With iron ore prices expected to fall, miner Rio Tinto is replacing expensive train drivers in Australia with automated robot locomotives

PUBLISHED : Friday, 04 October, 2013, 12:00am
UPDATED : Friday, 04 October, 2013, 3:04am

Train drivers employed by Rio Tinto to haul iron ore across Australia's Outback make about the same money as surgeons in the United States. It is little wonder the mining company will replace them with robot locomotives.

The 400-plus workers in the remote Pilbara region who earn about A$240,000 (HK$1.74 million) a year are probably the highest-paid train drivers in the world. Australia's decade-long mining boom has sucked up skilled workers, raising wages for engineers to drivers at Rio, the second-largest exporter of the mineral, and at its closest competitors, Vale and BHP Billiton.

The three companies that control about 59 per cent of the US$145 billion-a-year global iron ore trade are automating to bolster margins and squeeze out extra capacity as they boost supply to a record to feed steel mills in top buyer China. The push by Rio, which aims to move about 290 million tonnes on its rail network by next year, is expected to be the biggest driver for cost cuts in its iron ore unit after currency swings, Deutsche Bank says.

All producers are chasing better margins and stronger returns

"All producers are chasing better margins and stronger returns," said Chris Drew, an analyst in Sydney with Royal Bank of Canada. "Rio is ahead of the competition in terms of automation of trucks and trains," Drew said after touring its ore operations in the mostly arid Pilbara, home to Western Australia's biggest deposits for export.

The pace of automation is picking up as the seaborne market is poised for at least four years of gluts. The price of ore, which rose as much as eightfold in the past decade on Chinese demand, will drop to US$80 a tonne in 2015, according to a Goldman Sachs forecast. It has been trading around US$131 a tonne.

Rio, which last year approved spending of US$7.2 billion to expand the iron ore operations, is aiming to have the world's first, fully automated, long-distance and heavy-haul rail system operating in 2015. Its automated rail will have 1,500 kilometres of track, 10,000 wagons and individual train sets 2.3km long, according to Credit Suisse. The company is spending US$518 million on the programme that was announced last year.

"You need to have quite a significant amount of scale" in fleet and volumes to benefit from automation technology, said Evy Hambro, a fund manager at BlackRock.

Rio's rail, port and truck movements are all watched over from a control centre in the Western Australian capital Perth, 1,500km to the southeast, that has about 250 controllers working three shifts a day. The rail automation is part of the company's push to use technology to improve productivity and safety and gain extra capacity from existing assets, said Simon Prebble, general manager for Rio's automated trains project.

The competitiveness of some iron ore mines in the Pilbara as well as some future projects is set to improve with the adoption of the new technologies on trucks and trains, Australia's Bureau of Resources and Energy Economics said in a report on Wednesday.

Iron ore will remain the dominant earnings driver for BHP and Rio as rising production offsets falling prices, Citigroup said in a September 13 report.

The mineral accounted for 78 per cent of Rio's earnings before interest, depreciation and amortisation last year, and 92 per cent for Vale, according to Bloomberg data. BHP had 43 per cent ebitda from iron ore in fiscal 2013, the data shows.

Rio also plans to automate about 40 per cent of its Pilbara truck fleet by 2016. The goal is to reduce costs to US$15.60 a tonne by 2020, from US$23.10 a tonne in the first half of this year, Paul Young, a Sydney-based analyst with Deutsche Bank said in a report after touring operations last month, citing Rio data.

Rio may be able to cut its wage bill for train drivers by about A$100 million annually should it reduce train driver numbers by 400, CIMB Australia analyst Michael Evans said last month in a report following the tour.

Vale's automation plans are headlined by its US$20 billion Serra Sul project that will be the first to fully replace in-mine trucks with conveyor belts 37km long, the Brazilian company said. BHP started a trial of 12 driverless trucks at its Jimblebar iron ore mine this year and opened its own remote operation centre in Perth in July.

"Once Rio has cracked it, I wouldn't expect BHP to be that far behind," said Paul Phillips, a Melbourne-based fund manager with Perennial Growth Management.