This is what Rio Tinto thinks bears are missing on iron ore

Rio Tinto says steel demand will continue to grow over the next two decades, justifying expansion plans that will take its Pilbara iron ore output beyond 360Mtpa

The star Rhodes Ridge mine, to be developed around the end of this decade could eventually become a 100Mtpa monster

Iron ore boss Simon Trott not concerned about threat of oversupply

The world’s biggest iron ore exporter Rio Tinto (ASX:RIO) does not buy that the ambitious expansion plans of it and its rivals will lead the market on a happy and oblivious sleepwalk into a state of oversupply as they seek to add tens to hundreds of millions of tonnes into the global supply chain in the next decade.

Speaking to media in Perth yesterday as he outlined plans to deliver a new mine a year between 2024 and 2028 totalling a massive 130 million tonnes of expanded brownfields capacity, Rio’s iron ore chief executive Simon Trott said the general market missed the extraordinary tailwinds for iron ore demand as the developing world continues to urbanise.

It comes despite acknowledgements in recent times from Trott and Rio’s head honcho Jakob Stausholm that the world’s largest steel market, China, the port of call for 75% of the world’s seaborne iron ore supply and home of nearly 60% of crude steel output globally, has seen steel demand peak.

Rio’s developments will replace old mines and grow its output to between 345-360Mtpa by 2028, with the current development of the Western Range JV with the world’s biggest steel producer Baowu to be followed with the construction pending approvals of West Angelas, Hope Downs 1, Brockman 4 and Greater Nammuldi, which boast a range of IRRs of 30-80%.

To get there it will need to be comfortable shipping an increasing proportion of its lower grade SP10 product, now expected to be between 13-15% of its shipments.

That is before the development later this decade of Rhodes Ridge, a near 62% Fe ore body that could deliver more than 100Mtpa at full flight and restore the industry baseload Pilbara Blend to over 85% of its sales.

Rio isn’t the only iron ore miner in expansion mode. BHP (ASX:BHP) wants to ramp up medium term from 290Mtpa to ~330Mtpa, while Fortescue (ASX:FMG) hit a record of 192Mt last year and plans to expand its new Iron Bridge magnetite mine to 22Mtpa within two years.

Vale has latent capacity still, Hancock Prospecting has expansion plans and Mineral Resources (ASX:MIN) will open its 35Mtpa Onslow Hub next year. Then there’s Rio’s own Simandou project in Guinea — the world’s largest undeveloped deposit of high grade 65% pure iron ore.

Rio has also revealed plans to grow its new Gudai-Darri mine incrementally from 43Mtpa to 50Mtpa for just US$70 million, less than a year after hitting nameplate capacity.

But Rio thinks steel demand globally will grow from 1.7Bt in 2022 to 2.1Bt in 2050, with as much iron ore needed to feed the beast in the next 20 years as was supplied in the past 30.

Trott doesn’t think the market is heading for a situation like the oversupply seen in 2013-15, when prices bottomed out at US$38/t and Rio et al shelved thousands of jobs in the Pilbara.

“I can only talk to the projects we’re progressing and not our competitors, but if you go back to the chart at the start of the presentation, the world’s going through 2 billion tonnes of iron ore every year and I think that that point’s probably a bit lost,” Trott said.

“If you compare this industry to where it was 10 years, 20 years ago just that size of the industry, each and every year the replacement that requires is obviously significant.

“And so I quoted the next 20 years, you’ll need the same amount of iron ore as the last 30. And so the world is going to need new projects.”

Iron ore price continues to go from strength to…

Trott says iron ore will remain an attractive market going forward, saying the development of Simandou has always been in Rio’s models.

“All of the capital investment decisions that we’ve made are factoring in Simandou coming on and the world will need it particularly in the context of green steel,” he said.

It comes as Rio studies new methods in partnership with steel producers, science groups and tech providers to produce low emissions steel with lower and mid grade Pilbara ores, which make up 75% of seaborne iron ore market.

“We’ve got to make sure that this business is supplying today’s steel industry and we’ve actually got to make sure that this business is set up to supply potentially some of the steel industries of the future,” he said.

For now, the current steel industry is a very lucrative customer (actually over 100 customers) for Rio.

62% Fe iron ore futures were fetching US$115.85/t in Singapore with sentiment, infrastructure and manufacturing spending in China helping power a 1.7% lift in steel output this year despite an increasingly weak property market putting pressure on Chinese mill margins.

The big banks largely see iron ore falling to US$100/t by year’s end and below next year, though some investment banks have grown more bullish, with JPMorgan recently upping its iron ore forecast 13% for 2024 to US$110/t and UBS lifting its long-term outlook from US$65/t to US$85/t.

Current prices are more than 5x higher than the US$21.2/t cash cost of Rio’s mines in the first half of 2023. It thinks by growing production those costs can come down to US$20/t after inflationary pressure added US$6/t over the past five years.

While Rio and other industry players have strong supply growth projections, it is tempered by the fact approval timelines are blowing out. Averaging two years in 2003, that had grown to three by 2018 and now sit at four years.

That raises the prospects output growth could stall as demand from an urbanising third world — as many people are projected to urbanise in the next decade as they did in the last — powers the steel sector despite pressure from emissions reduction policies.

Charm offensive

It comes as the world’s biggest miners launch a charm offensive to bring investors, analysts and reporters under the hood.

Rio Tinto’s media engagements this week come hot on the heels of a similar event led by Fortescue Metals Group (ASX:FMG) on Tuesday, and a week after an investor and analyst powwow from Rio at its Pilbara mines, with FMG having hosted analysts also this month.

Last week’s investor trip was Rio’s first since 2018, before Covid shut east coast number crunchers out of its West Coast mines.

A few things happened in the interceding years. Rio may have caused an international outcry by — entirely legally yet undeniably stupidly — blowing up a rock cave containing cultural artefacts dating back in excess of 40,000 years.

Its mined output hit a record level of 338Mt by 2018, but fell sharply to 320Mt by 2021, only kept on top of the global leaderboard after the deadly Brumadinho tailings dam disaster prompted main competitor Vale to curb output in Brazil.

The message from the company now is the growth it saw across the 2010s was unsustainable. More ore was coming out of the ground but the health of its mines and assets was failing, (editorialising here) a cancer growing unchecked in an apparently healthy body.

Juukan Gorge was a reflection of a failure of process that failed to recognise the shifting sands of what made success in the industry.

Obtaining access to infrastructure was once the key — incumbents Rio, BHP and FMG are so successful because their ownership of port and rail assets have helped keep their costs at obscenely low levels.

Now the focus is access to markets — JVs with customers, ore grades and blends, and ensuring Rio can produce iron ore useful in a green steel future — and access to resources — including the co-design of mines and management agreements with traditional owner groups.

Trott’s reign as the head of the critical Pilbara iron ore division started with the post-Juukan top management clean out that claimed the heads of CEO Jean-Sebastian Jacques, corporate affairs boos Simone Niven and his predecessor Chris Salisbury.

Two and a half years in Rio is, understandably, painting a picture of improvement, saying its mine and asset health is improving and has the division positioned to expand.

That will have to include decarbonisation initiatives alongside its continued push to both grow supply and automate more of its operations.

Over half of its equipment, including most of its truck fleet, is now automated and run from a state of the art operations centre at Perth Airport.

Dino Otranto, CEO of the seemingly more ambitious competitor Fortescue Metals, whose chairman and major shareholder Andrew Forrest wants to see decarbonise its operations entirely by 2030, seemingly through down the gauntlet to his rivals to do more while talking to journalists onsite in the Pilbara this week.

Trott said decarbonisation was an industry-wide challenge and that Rio was committed to finding solutions to reduce emissions on its site.

It has wants to reduce its onsite emissions by 50% by 2030.

Rio is planning pilots for battery electric haul trucks in 2024-2025 and has 300MW of solar energy in advanced study, with wind monitoring also underway to test whether it can supplement solar resources including a new 34MW solar farm at Gudai-Darri with wind turbines.