Rio Tinto Group has to work twice as hard to turn the profit it did a decade ago.
Back in 2004, the world’s second-biggest mining company produced about 60mn metric tonnes of iron ore and reported underlying earnings of $1.3bn in the second half of the year. Now it extracts about 130mn tonnes in six months for roughly the same profit.
The numbers show how Rio, like the rest of the mining industry, has been a victim of its own success. The 143-year-old industry titan has spent $90bn expanding and building new operations over the past decade - its most profitable division, iron ore, being the major recipient.
The spending spree was sparked by surging demand created by China’s unprecedented economic boom which led to soaring commodity prices and delivered record profits in the years leading up to 2011. However, when China’s economy began to sputter, mining companies kept investing, churning out more raw materials despite weakening demand, causing prices to collapse. At the time, companies argued that if they didn’t expanded production, others would and erode their market share.
“The volume over price strategy, adopted by not just Rio Tinto but by all of the majors, has been a net failure,” Richard Knights, a mining analyst at Liberum Capital Ltd in London, said by phone. “With the benefit of hindsight, I think we can say that more disciplined supply would’ve been better for the whole industry as it would have extended the period of super- normal profits.”
Rio, which also produces aluminium and copper, reported underlying earnings of $1.56bn for the first half, the lowest since 2004. It’s a long way from the record $8.2bn profit from the second half of 2010, when iron ore was approaching $200 a tonne. The steel-making ingredient is now about $60 a tonne. With commodity prices staying depressed, mining companies have been forced to get leaner by reducing costs and cutting dividends. Rio said on Wednesday that it would cut the dividend in half, reflecting a new policy to pay out a percentage of earnings.
The company’s shares declined 1% to 2,399 pence in London, cutting this year’s gain to 21%.
Rio plans to spend less than $4bn this year, down from almost $18bn in 2012, said Chief Executive Officer Jean Sebastien Jacques, who last month became CEO after years of running the copper business. He emphasised a strategy of investing in existing projects and expanding profitable operations, rather than focusing on mergers and acquisitions.
“Have we learned from the past? I think we have. I truly believe we have,” Jacques told reporters in London. “We are very clear that we have little capital available to be spent because that’s one of the key criticisms we’ve had in the past. At the peak of the cycle, we were spending too much money.”
The outlook presented on Wednesday provided little scope for optimism. Rio struck a cautious tone in describing China, responsible for almost half of its sales, as being on a “long transition path of slower and less commodity-intensive growth,” according to the company’s statement.
Still, there are signs that business is stabilising. Rio shares have rebounded from a 34% rout in 2015. The company is adjusting to weaker demand growth in a post-China boom era, according to Peter O’Connor, a Sydney-based analyst with Shaw and Partners Ltd
“We are back to a normal world of growth,” O’Connor said by phone. “It’s not a bad world, it’s what we had for four decades or so. It’s just not offering growth rates of 5 to 10%.”
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