China & Metal Boom
Nice article from IDB on how China is driving the metal consumption and prices.
China (What Else?) Drives Growth At Metals Supplier
BY MARILYN MUCH
INVESTOR'S BUSINESS DAILY
Posted 4/24/2006
China's hunger for new infrastructure and goods has turned it into the world's biggest consumer of steel, copper and aluminum.
The country consumes 33% of the world's steel and 22% of the world's cooper. Some of the raw material is mined domestically, though a whole lot is imported from elsewhere.
A key supplier of imported goods to China is Rio Tinto. (RTP) The London-based metals and minerals mining company has enjoyed a recent spike in business, thanks to heavy demand from China and other global markets.
"We're in the midst of one of the greatest mining cycles we've seen in decades," said analyst Victor Lazarovici of BMO Nesbitt Burns.
Metals consumption has been growing worldwide at 3% to 5% a year, Lazarovici says. And supply is tight.
In terms of volume, Rio Tinto is the world's No. 2 producer of iron ore and coal, the fourth largest producer of copper and diamonds, and the sixth largest producer of aluminum.
It's the world's top producer of borates, talc and titanium dioxide slag, plus the largest exporter of salt.
And it's one of the world's top 10 producers of gold as a byproduct of copper mining.
Just more than half of the firm's assets are in Australia. About 30% are in North America. It also has assets in Latin America and Africa.
"We're enjoying strong demand and strong prices in almost all our major commodities," said Rio Tinto spokesman Andrew Vickerman. "As China's level of consumption (of these metals) has continued to increase, it's had a strong and cumulative effect on global demand for these metals and hence on prices."
In 2005 the average price of iron ore reached $53 a metric tonne. That was up 72% from the prior year, says Tom Stundza, executive editor of Purchasing magazine, which focuses on news geared toward procurement officers and supply-chain execs.
Stundza estimates that when annual contracts on iron ore prices are settled at the end of this month, the average price should rise an estimated 10% to $58 a metric tonne.
Over the past couple of years, the price of copper has more than doubled to an average price of $2.68 a pound from $1.30 in 2004.
Rio Tinto's business ebbs and flows with the commodities cycle. The company watched earnings decline in 2002 and 2003, but has averaged 92% profit growth the past two years.
Earnings in 2005 more than doubled from the prior year to $14.53 a share. Revenue rose 47% to $19 billion. About 15% of its revenue came from China.
First Call analysts see earnings rising 28% to $18.60 this year. After that, however, they project four straight years of profit declines.
Despite the projected earnings slowdown, Lazarovici figures China's need to import metals from the West isn't likely to ebb — at least not before the 2008 Olympics in Beijing and Expo 2010 in Shanghai.
"Rio Tinto is well positioned because a lot of their commodities are sourced from Australia, which is relatively close to China's mainland," Lazarovici said.
The company also has an interest in a large copper mine in Chile, another good locale for shipping to Asia.
Meanwhile, Rio Tinto's long history of selling to China has helped it develop strong relationships with major steel producers there, Vickerman says.
"We feel that these strong long-term relationships (put) us in a good position for (our) strong growth in China," he said.
To help meet iron ore demand, Rio Tinto is spending close to $3 billion to expand capacity in a series of iron ore mines in western Australia.
The project, which is about half complete, also involves expanding rail and ports and associated mine infrastructure in western Australia.
Rio Tinto expects to produce and ship nearly 200 million tons of iron ore a year by the end of 2007, up from 50 million tons in 1999.
In terms of exploration, Russia is one country that holds promise. In January, Rio Tinto launched an exploration and development joint venture with Norilsk Nickel, Russia's largest mining and metallurgical company.
Under the accord, Norilsk will have a controlling 51% stake in the joint venture company. Rio Tinto will own 49%.
Initial exploration will focus on opportunities in the Siberian and far eastern federal districts of Russia. Rio Tinto's exploration activity will focus on base metals and gold.
"The reason for the joint venture is risk mitigation," analyst Lazarovici said. "Rio Tinto and everyone else (in the field) is increasingly looking into more remote areas for new production and particularly for large, underdeveloped mines in Russia and Africa — two regions where large ore bodies have yet to be discovered or developed."
posted by Raman @ 11:39 AM
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