Rio Tinto Reports Dip In Coking Coal And Iron Ore Production

Rio Tinto, the third-largest mining company in the world, has come up with its first quarter numbers for the financial year 2012. Herein, the production of two major commodities viz. iron ore and coking coal has been below the market expectation. The company’s iron ore production grew by 9 per cent to 45.6 million tonnes while the market expectation was 47 million tonnes. On the other hand, coking coal production grew by just 5 per cent to 1.7 million tonnes as compared to the same period last year. The lower growth in production was mainly due to bad weather in Australia which disrupted mining activities in the region.

China, the biggest iron ore customer for Rio Tinto, has been going through some tough economic cycles and has reported lower GDP growth rate in the first quarter of 2012. However, the company believes that the demand for steel will increase in the country in the second quarter as inventories have stopped rising and this is a good sign for the market in terms of an improving demand scenario.

The company has further said that the heavy rainfall of March is expected to hamper the production of coking coal during the second quarter. A similar situation last year had led to a huge jump in the commodity prices. The supply shortage this year will impact the steel companies as coking coal remains a major source of energy and cost component for producing steel. Higher demand and supply shortage will also lead to an increase in the prices of hard coking coal. Indian steel firms like SAIL and JSW Steel largely depend on imported coking coal from Australia.

Also, iron ore, a major raw material required to produce steel will see an uptick in the international prices due to supply disruption in Australia. Presently the prices of domestic iron ore are more or less the same as the imported ore due a shortage of supply in the country. The ban on iron ore mining in Karnataka and logistic issues in other states has led to a huge iron ore shortage and companies like NMDC and Odisha Mineral Ltd have increased the prices of higher grade iron ore lumps to Rs 350-500 on a per tonne basis.

In our opinion, in the coming quarter the prices of coking coal will move higher by USD 15-20 per tonne to USD 250, thereby leaving little scope for the domestic steel companies to improve their margins as the iron ore prices are already high and the demand has not become stronger.