23 de junio de 2016 / 6:01 / en un año

COLUMN-Rio Tinto's cleared the decks, now time to change iron ore tack: Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Clyde Russell

LAUNCESTON, Australia, June 23 (Reuters) - - The beautiful thing about cleaning out the executive ranks is that it gives a company an opportunity to press the reset button on strategies and positions.

Rio Tinto should seize the moment and come up with a forecast for Chinese steel output that is more realistic.

Jean-Sebastien Jacques, who takes over from Sam Walsh as chief executive at the start of July, has already moved to put his stamp on the world’s second-largest mining company.

Rio announced on Tuesday that the head of its iron ore division, Andrew Harding, would leave the company on July 1 as part of a restructuring.

Harding’s job of running Rio’s main profit contributor will be taken by Chris Salisbury, the current acting chief of copper and coal.

Iron ore accounts for some 90 percent of Rio’s profit, making it by far the miner’s most important division.

Harding would have been a candidate to replace Walsh as chief executive, so his departure can be viewed as giving Jacques a clear path at running Rio without a potential rival sitting in a key position.

It would appear that Jacques wishes to start his tenure with a clean slate, and all eyes will now be on how he uses the opportunity, given he will only get it once.

While the market has focused largely on how Jacques may expand Rio's copper portfolio, given his background in running that division, what he does with iron ore will be more crucial for the company's fortunes, especially given the close correlation between the share price and Asian spot iron ore .IO62-CNI=SI. For graphic, see: (tmsnrt.rs/28P4Aux)

The outgoing management of Walsh and Harding had already flagged that Rio would hold off investing in expanding its iron ore capacity further, given the market was at saturation point.

But neither Walsh or Harding ever publicly retreated from the company’s forecast that Chinese steel output would rise to 1 billion tonnes a year, despite ever-mounting evidence that production has already peaked.

RIO NEEDS NEW IRON ORE FOCUS

China’s steel output hit a record 823 million tonnes in 2014, dropped to 803.8 million last year, and is on track to fall further this year.

Steel production in the first five months of the year was 329.95 million tonnes, down 1.4 percent from the same period in 2015, according to China’s statistics bureau.

This is despite record production in March as steel mills responded to a surge in prices. Output in May was just short of the March record but market expectations are that steel mills will ease back in the second half of the year in order to prevent a glut from driving prices lower.

Certainly, the authorities in Beijing have made it clear that they expect the industry to reduce excess capacity in the next few years and moderate production.

In this scenario it’s hard to see how Rio’s forecast of 1 billion tonnes of Chinese output can be realised.

If this were to come true, it implies that Chinese steel output would have to rise to levels 20 percent above the record of 2014.

For this steel to be used domestically, China’s economic growth would have to accelerate back above 10 percent a year and return to being driven by infrastructure and building construction, rather than follow the stated policy of having economic expansion led by consumption and services.

The other possibility is that China does reach 1 billion tonnes of steel output a year at the expense of production in other countries.

Such a scenario would benefit the major seaborne iron ore suppliers like Rio, its Anglo-Australian rival BHP Billiton and Brazil’s Vale, but it also seems unlikely to come to fruition.

Countries with domestic steel industries are already moving to impose tariffs on Chinese imports, a trend that is likely to strengthen, especially if China did increase output and try to boost shipments of its surplus steel surplus.

Given that virtually nobody outside of Rio believes the 1 billion-tonne-a-year China steel forecast, and that Rio itself has declined to present any substantive research showing how it reached this vast number, it would seem to be no-brainer for Jacques and Salisbury to start afresh.

A more realistic forecast would allow Rio to develop a strategy for its vital iron ore assets that goes beyond the current laser-like focus on costs.

While the reduction in costs has been more than impressive, the market view is that the limits of cost-cutting are close to being reached, and a clearer picture of what’s next for Rio in iron ore would be welcome.

Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund.

Editing by Tom Hogue

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