Rio Tinto has defied the economic gloom being talked up by arch rival BHP Billiton after today approving a $US5.2 billion investment in its Pilbara iron ore business.
Signed off by Rio’s board, which is meeting in London, the investment will push Rio’s Pilbara production capacity to 353 million tonnes a year by the first half of 2015.
Rio is producing iron ore at a rate of 230mtpa and had already approved investment to boost output to 283mtpa.
Although the board sign-off had long been talked of, today’s confirmation ends speculation that Rio too would adopt a more cautious approach about the global iron ore market.
BHP has taken a decidedly negative view of medium term global growth while flagging that it would press the go-slow button on a raft of mega-projects, including the Port Hedland outer harbour development which is crucial to the growth ambitions of its own iron ore division.
Sharemarket investors are also increasingly cautious, as evidenced by the fact that the share prices of Rio and BHP are trading around three-year lows. At the heart of investor concern is that the European debt crisis will have a huge impact on China’s export industries, at the same time as signs are emerging that China’s internal growth is slowing.
Any significant slowdown in economic growth in China could have a big impact on demand for sea-borne iron ore, which is largely the reason BHP is hesitating to push ahead with the costly Port Hedland outer harbour.
In a statement today, Rio Tinto Iron Ore chief executive Sam Walsh said the miner continued to see “positive prospects for medium to long-term iron ore demand driven by ongoing growth in Chinese consumption”.
“We continue to forecast that annual Chinese steel production will grow from its current level of around 700 million tonnes to around one billion tonnes a year out towards 2030,” Mr Walsh said.
“This demand growth is coupled with an increasingly challenged supply response, as several high-profile competitor projects have recently been either delayed or postponed.”
Underpinning Rio’s faith in iron ore, the miner today also announced a further $US1 billion investment to advance its Simandou joint venture in Guinea, West Africa. Rio is developing Simandou with China’s Chinalco.
Rio Tinto shares were up 85 cents, or 1.5 per cent, to $57.62 by 1.25pm.