Rio Tinto’s biggest profit in nine years could be just the start, with the miner signalling it could capitalise on stratospheric iron ore prices by shipping record volumes of the steelmaking commodity this year.

Australia’s biggest iron ore miner is on track to post a full year underlying profit of close to $US12 billion next month, but with iron ore prices 76 per cent higher than Rio’s average received price over the past year, the record $US15.5 billion profit set in 2011 appears vulnerable in the year ahead.

Rio said Chinese buying patterns remained strong while demand from other Asian markets was recovering from pandemic lockdowns, creating boom conditions despite trade tensions between Australia and China.

Shaw and Partners analyst Peter O’Connor said if iron ore prices remained at Monday evening’s price of $US174.07 per tonne for the remainder of this year, Rio would almost double its best ever result with earnings of more than $US29 billion.

But Rio warned investors that while record iron ore exports were possible in the year ahead, an enhanced focus on Indigenous heritage following last year’s Juukan Gorge scandal and challenges with delivering new mines inside Western Australia’s hard border could hamper export rates.

Rio said it would ship between 325 million and 340 million tonnes of iron ore in 2021.

That target range straddles the 330.6 million tonnes that Rio shipped from Western Australia last year, but implies there is more scope for growth than a reduction in output.

Analyst consensus has expected Rio to ship 336 million tonnes in 2021.

Rio has never done better than the 338.1 million tonnes shipped in 2018, but Tuesday’s guidance range implies that record could fall if all goes to plan.

Risks outlined

Export targets from Australian iron ore miners are always subject to weather, given the bulk of the nation’s output comes from the cyclone-prone Pilbara region of WA.

But Rio put a couple of extra qualifiers on its export target for 2021.

“Iron ore guidance takes into account the risks associated with tying in approximately 90 million tonnes of replacement mine capacity,” Rio said in a statement.

“The future impact on our Pilbara iron ore operations, mine developments and heritage approach from the reform of the Aboriginal Heritage Act 1972 (WA) remains unknown.”

Destruction of Juukan Gorge has severely tested Rio’s relationship with the Puutu Kunti Kurrama and Pinikura traditional owners, and Rio has pledged to implement a permanent moratorium on mining around the gorge as part of efforts to heal the relationship.

Regulatory impact

Rio was not explicit on Tuesday as to what impact a permanent moratorium would have on the nearby Brockman 4 iron ore mine.

Goldman analyst Paul Young speculated last year that the regulatory response to Juukan Gorge could be a watershed moment for the resources industry, leading to weaker export growth in future.

But Rio stressed it had a lot of flexibility across its iron ore division, which should enable it to cope with any required changes to mine plans.

Rio shipped 88.9 million tonnes of iron ore from Western Australia in the final three months of 2020, in a result that was slightly better than expected.

The strong finish to the year means Rio achieved the export target it set at the start of 2020.

That target was downgraded after cyclones hit WA in February 2020, but Rio recovered to sneak into the bottom end of its original guidance range.

The China effect

Import data from China suggests strong demand from the Asian superpower may have been a bigger factor in the recent iron ore price strength than Brazilian export weakness.

China’s iron ore imports rose by 9 per cent in 2020 to a record 1170 million tonnes.

The extra 101 million tonnes imported by China last year may overshadow the reduction in iron ore exports by Brazil in 2020.

Brazilian miner Vale will report sales and shipment information later this month, but its sales slump is not expected to exceed 100 million tonnes.

Vale achieved record exports in 2018 when it sold 365.5 million tonnes of iron ore products.

UBS analysts said there was no sign of iron ore prices softening in the immediate future, with steel demand strong, Chinese steel exports resuming and the risk of further supply disruption in Brazil after a fire at a major iron ore port in the past week.

In China the industrial sector has recovered and is now at pre-COVID levels due to the rapid deployment of stimulus.

— Rio Tinto statement
Rio said Chinese buying of iron ore remained robust while demand was recovering from lockdowns in other markets such as Japan, Korea and Taiwan.

”In China the industrial sector has recovered and is now at pre-COVID levels due to the rapid deployment of stimulus,” Rio said on Tuesday.

”A policy shift to promote domestic investment and consumption is supportive of the commodity demand outlook.”

While the boom in iron ore prices augers well for Australia, the prices are also incentivising miners and steelmakers to look for new iron ore options in other nations, and Rio confirmed that activity had resumed at its Simandou iron ore tenements in the African nation of Guinea.

“Activity at the mine area is starting including roadworks,” Rio said on Tuesday.

That review will help inform Rio’s negotiations with neighbouring iron ore aspirants in the Simandou mountains.

Former Rio chief Jean-Sebastien Jacques signalled last year that the high cost of infrastructure to get Simandou’s iron ore into seaborne markets ensured it may make sense for the various miners in the region to work together on infrastructure.

Fonte: Financial Times