Wealthy Nations Daily Update - Rio Tinto

In February last year Sam Walsh, Rio Tinto's chief executive, was asked if the iron ore price could reach $30 a metric ton. His reply was pretty blunt, “That’s fantasy land, it simply can’t happen” adding, “There are very wild forecasts out there that quite frankly just can’t come to pass, otherwise it’s going to be very lonely for us as the lowest-cost producer in the world”. At the time iron ore was trading at $63 a metric ton.

Today, at time of writing, the commodity is trading at approximately $41 a ton, slightly higher than where it started the year, but 35% lower than February last year. Adding to the global growth slowdown that has put downward pressure on prices, is the fact that small producers have added 400m tonnes of capacity to the global glut over the past 5 years. Not that these new producers are of concern to Walsh, who said, "Most of that tonnage falls into the high-cost category. So at the moment, those people are hanging on by their fingernails" adding, "But sooner or later the adjustment will take place".

The iron ore industry is dominated by a small number of ultra large producers with a low cost base. These companies have been happy to increase production to counterbalance falling prices, however this is not to say they are not feeling the pinch. Jobs, investment and costs have all been cut due to the current situation. Anglo American, Freeport-McMoRan and Glencore have all suspended dividends. This is one area Walsh seems passionate about. Whilst acknowledging 2016 will be a tough year, when asked about dividends in December last year he said, "Personally for me, they're very, very important. We have shareholders who have invested in our business, they've put their faith in us, and then I believe they need a fair return".

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