Rio Tinto’s new [iron ore] opportunities for industry growth – Sam Walsh: Rio Tinto Chief Executive, Iron Ore & Australia (24 March 2011)

This speech was given by Sam Walsh – Rio Tinto Chief Executive, Iron Ore & Australia – at the Metal Bulletin Conference, Beijing, China on March 24, 2011.

Thank you Mr Li.

Before I start, I would like to acknowledge the recent tragic events in Japan, as a result of the earthquake and subsequent Tsunami.

The unfolding story has been most graphic and the human, business and social costs just extraordinary.  Many of you here today will have close links with Japan and our sympathies go out to them at this difficult time.

The past year has been a remarkable one, notable not only for the steady emergence from the global financial crisis but also the domestic challenges thrown up by government taxation issues and greenhouse gas schemes. In our business, it is difficult enough to manage the manageable, and with such huge investments of risk capital at stake, it is important to get the policy settings right and then stick to them.

The global scene has also shifted, with several major producers altering their marketing arrangements such that pricing of iron ore moved away from the annual benchmark negotiations we had relied on for many years to a new, not altogether settled quarterly pricing system we have now.

Time will tell if it remains the preferred means of matching buyers with producers while also incentivising sufficient new supply to meet global needs.

In my address to day, I want to briefly cover the Rio Tinto ‘way’; the likely shape of global demand for the foreseeable future; how we are rapidly moving to meet that demand; and some examination of Australia’s largest mining project – our 333 expansion in the Pilbara.

I will not attempt to outline all that we are doing, but rather confine myself to the central issues facing us.

It is most fitting that I am discussing the present and future of the iron ore industry here in Beijing.

Rio Tinto’s links with China go back a very long way, and have only strengthened in recent times.

One recent highlight was our principal sponsorship of the Australian pavilion at the Shanghai expo – a stunning event, extremely well managed and a towering advertisement of the new China and its place in the world.

Some of our formal business partnerships have long been in place, others of course relatively new.

The iconic Channar JV has recently been extended.  The Bao- HI JV continues most successfully.

More recent agreements with our largest shareholder Chinalco will provide a most positive platform for the future.

This includes not only the historic JV agreement with Chalco to develop the Simandou mine in Guinea, but also plans to explore for world-class mineral deposits in China itself.

Work is well underway to identify the most promising prospects for study and we look forward to rapid progress.

Rio Tinto’s general strategy is very straightforward indeed.  We find, mine and process mineral resources the world over, producing aluminium, copper, diamonds, energy products, gold, industrial minerals and salt and iron ore.

We invest in and operate large, long term, low cost mines and businesses, driven not by choice of commodity but by the quality of each opportunity.  We have some of the world’s best assets and have a proven track record in executing projects.

And, as an organisation with global reach, the Group is able to respond to rising demand for metals and minerals from both developed and developing countries.

All underpinned by a single set of values, of safety principles; one way of operating.

This provides an ideal platform for anyone in the business to see and experience the world at large – a valuable recruiting tool in its own right – and it also provides an efficient means of cross-skilling our leaders and sourcing expertise widely from within our global ranks.

As this summit demonstrates, global iron ore demand for the foreseeable future is strongly driven by China.

Without dwelling on this chart, and in concert with what we have seen and heard from other analysts and predictors, two very important things are apparent going forward:

Firstly, the expected continuing growth of the Chinese market.

Growth will be driven by building and infrastructure investment over the next decade, complemented by manufacturing and consumer led demand.

Secondly, there is enormous potential associated with other emerging markets, such as India and Southeast Asia

For the China story, the aggregate figures belie another tale – the intra-country differences in scale and the widely varying levels and pace of development.

Much has been said of the rapid urbanisation highlighted by Shanghai and Beijing.

Steel use in the high density, export-dominated cities of Shanghai, Tianjin and here in Beijing is already at the high levels of developed markets like South Korea. But what is truly remarkable is what is yet to come.
Many large provinces are just beginning to climb the steel intensity curve.

Per capita steel consumption in China’s centre and western provinces, some with populations of 90 to 100 million apiece, is not even at half the coastal provincial levels.

The central government is now focusing efforts in these less developed parts of China and business is looking to those areas as well to provide new sources of lower-cost labour to service production for internal markets.

To look at it another way…

The Economist magazine printed a map recently highlighting the fact that the United States, for all its economic woes, was still the world leader.

Ranking by the size of their economies, it lined up each of the 52 states with a country of similar size.
Russia was equivalent to Texas, Italy to California, Australia to New York, and so on.

Using a similar approach, this map shows the steel production of each Chinese province, aligning it with their global equivalents.

This sort of comparison does highlight two critical observations: Firstly, the remarkable disparity between the provinces, which I have already referred to and secondly, the highest steel production provinces in China have already matched such giants as the EU, Korea and India…and they are just getting started.

Future plans for logistics infrastructure imply continuing strong investment. It is broad-based and comprehensive.

There can be no doubting the profound step change in infrastructure provision when it includes a near-doubling of the total expressway distances available.

The volume of infrastructure under construction is one dimension of steel growth potential.

Another is the increasing steel intensity associated with higher city densities and building heights.

This will have significant implications for the iron ore producers too, as high-quality steel  will increasingly be required for the new-scale structures.

We all know that bringing on supply is not easy.

In our own case, we have had our own difficulties through the global financial crisis to manage.

The Pilbara is obviously the driver of our global iron ore portfolio, and it will continue to be for decades to come.

The historical view shows rapid expansion over 40 years and in particular the last decade, to a large extent enabled by the far-sighted and prodigious investment in the original mines and supporting infrastructure.

By 2000, we were operating six mines, a rail line and two ports. Back then, we had about 4500 employees and produced 72 million tonnes of ore a year – it seemed like a lot at the time.

Rio Tinto had only just completed the acquisition of North Ltd, which added Robe River and Iron Ore Company of Canada to our portfolio.

Our biggest market for iron ore was Japan, although we were working hard on growing our relationships with Chinese customers, since we made the first shipment of imported iron ore to China in 1973.

Of special note was the relationship forged with SinoSteel 20 years ago, and I was very pleased late last year to sign the extension of the Channar joint venture – an enduring collaboration which has proved a great success, and is ongoing.

To the present Pilbara in which, over the last decade, we have committed over $US 18 billion.  Which for us is a quality iron ore precinct which will long continue to provide the bulk of our production and sales.

We have established a comprehensive knowledge of our tenements, and especially a better understanding of the richness of our ore bodies and the long mine life capacity.

I think we still have some way to go in knowing the full potential of the Pilbara, and of what lies beneath our feet.

We have full operational integration across our 14 mines, 1400kms of rail and 3 ports. This is of course assisted by our Operations Centre in Perth, controlling this network and other infrastructure.

Our current capacity is 225 Mt/a, bolstered by a robust growth strategy with almost limitless potential.

Maintaining smooth production is hard enough, let alone expanding simultaneously.

Last month we experienced two Tropical Cyclones and a low depression system in rapid succession, severely impairing many of our operations and damaging rail lines.

We have only just regained momentum, and our quarterly production report will highlight the impact.

Bringing on new supply is also fraught with difficulty, and not just for incumbent producers.

It is one thing to have a vision, and then convince financiers and the markets to share that vision, but it is quite another to deliver on the promise.

New deposits are all very well, but the issue always comes down to ability to build and efficiently run assets.

Many new projects have significantly exceeded feasibility capital costs and construction and ramp up lead times.

Beware those who boast of having more land under lease than any other company, or maps coloured in as fully as the old British Empire once was.

That isn’t mining; that’s real estate. Rio Tinto is expanding its Pilbara operations capacity to 333 Mt/a by the end of 2015.

We are doing this by a series of incremental steps, adding 5 Mt/a to our Dampier operations to bring us initially to 230 Mt/a, while we simultaneously work on adding a huge 103 Mt/a extra capacity through our Cape Lambert port, itself being commissioned in two approximately equal phases in order to bring product to the market sooner.

It is Australia’s largest integrated mining project, with a cost approaching US$15 billion and a requirement for almost 7000 people working for us on the construction component.

Bear in mind that this cost is just to expand the existing business, which itself needs to be paid for, reinvested in and sustained.

The current mines do not magically replenish themselves, or continue ad infinitum, and so we will always need projects such as our latest Marandoo extension to provide sustaining tonnage.

At our November 2010 investor seminar, we put the approximate cost of Rio Tinto’s new tonnage in the Pilbara at about US$130/tonne which includes all costs.

Given the current tight market for contracting and the procurement challenges, I suspect some competing projects will begin to struggle.

The largest single component of the project is the construction of the second terminal at Cape Lambert.

For those of you who have been there, you will understand why this port became known as the “jewel in the crown” of Rio Tinto’s business and the envy of others.

It is in open water, requiring minimal dredging, unencumbered by close neighbours and competing traffic, with ample space to optimise stockpile configurations and support infrastructure.

In short, it is the most readily expandable large-scale blue-chip asset in the industry.

And as you can see in the “Options” panel there, the sky’s the limit.

We do not expect our expansions to stop at 333, but they will be decisions for another day.

We run an integrated operation.

In practical terms, it is no good having the best ports in the business if there are not the mines to provide throughput, or the rail system to get it there.

The construction of additional mine capacity and rail assets is obviously a significant component of the expansion.

We can broadly divide our operations into two large zones of equal size, with the smaller Robe Valley network to the west.

Our strategy of developing close to each other, and close to infrastructure, can be seen here.

We are expanding throughput across the established rail network, lowering unit costs and protecting margins.

The headline numbers attract the most attention, but breaking up a project of this magnitude might shed some light on just what is involved.

The major infrastructure required is outlined here – from the two full-size dual dumpers, the four stackers and three reclaimers, to the new power generation assets and the accommodation for the greater numbers working in the Pilbara.

We have progressively updated our rail fleet, and I want to make special mention of our outstanding supplier QRRS (Qiqihar Railway Rolling Stock), who have produced more than 3,700 ore wagons for us – close to half our rolling stock – and they are performing very well indeed.

Keeping all of this tightly ‘on track’ is in itself an enormous task.

I will leave the grand predictions and bold pronouncements to others, and simply say this: If experience counts for anything, success will follow success.

Our record of expansion over the past decade is a strong testament to our ability to manage difficult projects with time and cost constraints, consistently. Even in the recent years of expansion, with the resources boom in full-swing, demand easily exceeding supply and the phenomenon they call “Pilbara inflation” off and running, we have demonstrated our ability to maintain appropriate control.

The controllable costs have been well managed.

That is our primary focus, given those costs that are beyond control, such as exchange rate movements, also have a bearing on outcomes.

Obviously we need to bear those in mind as we go, even if they are outside the reach of our project management.

We now have over 10,500 people employed in the WA iron ore business – and by that I mean the operations workforce, not the separate expansions components – and that figure will rise by about 50% over the next five years to 15,000 workers.

In addition to those workers, our construction programme demands are extraordinary as we approach our 333 Mt/a capacity target.

We will expect to use, at varying time and for varying periods, close to 7,000 construction workers on the expansion.

While I’ve concentrated on the Pilbara – and for good reason – our global supply story is also about building a growth platform internationally, so that we are well positioned to supply all future growth markets competitively.

We have a successful business in Canada, where that country’s largest iron ore operation, the Iron Ore Company of Canada is also expanding quickly to meet heightened demand.

IOC is a significant asset in Rio Tinto’s portfolio with a high grade, expandable iron ore mine and premium logistics infrastructure.

IOC is currently boosting annual concentrate capacity by four million tonnes to 22 million tonnes by 2012, en route to a planned capacity of 26 Mt/a. 

Beyond this, IOC has the potential to expand to at least 50 Mt/a.

Most of the IOC concentrate is pelletised and due to its geographic proximity, sold to its traditional markets in North America and Europe.

During 2009/ 10 we tested the Chinese market with quite some success.

Let no-one doubt that Simandou, in Guinea in West Africa, is a truly world-class project in a world-class precinct.

To date, Rio Tinto has invested some US$700 million in the project and it represents one of the principal components of Rio Tinto’s growth programme.

Our current plan for Simandou is to develop a mine with an annual capacity of around 95 million tonnes per annum, with production commencing in 2015.

We are keen to produce tonnes earlier if infrastructure constraints can be removed.

The mine would be linked to an infrastructure complex comprising a 650-kilometre industrial rail road and a four-berth wharf.

This will be the largest mine development project in Africa to date, costing more than US$10 billion to construct before any ore is produced and involving extensive port, mine, rail and power infrastructure.

This will be the largest single iron ore mine ever developed and the largest private infrastructure project in Africa.

An investment of this type will have a transformative impact on Guinea, making substantial and equitable improvements to the quality of life of Guineans.

We will implement responsible health and safety, community, engineering, human resources and operating standards that positively transform the way mega-projects in Africa are conducted.

Rio Tinto is committed to protecting Guinea’s rich and diverse natural environment, particularly in the Guinée Forestière area.

Our Tier One iron ore project took a significant step forward last July when we signed a binding agreement to establish a joint venture with the Chinalco subsidiary, Chalco.

This partnership makes great sense, bringing valuable skills and capabilities to the project, including providing access to the infrastructure expertise of other Chinese organisations.

We are committed to bringing this project to market and are working closely with the new Guinean Government to enable a clear pathway for development.

To add to our global supply strategy, we are also focused on developing an iron ore mine in the Orissa province in India’s East with our two joint venture partners – Orissa Mining Company and NMDC.

India’s ability to source the majority of its iron ore demand from internal production emphasizes the importance of this development as an entry point to supply iron ore into a significant growth economy.

Our JV leases are geographically well positioned in a relatively unexplored region and provide significant potential for establishing a major iron ore business within this key future market.

We are currently awaiting final Government approval to progress this project.

Let me now go back to where I started.

It appears that each year there is something unforeseen to discuss.

That the nature of mining, but it’s also the nature of the world at large.

For example, the impacts of the Japanese earthquake and Tsunami have been many and diverse.

Some steel mills have suspended operations and suppliers of heavy machinery such as Hitachi have been impacted.

More generally, large plants such as General Motors are shutting, as they run out of Japanese component parts.

There is a large country reconstruction ahead, the magnitude of which is only just being realized.

It is true to say that recovering, developing and developed economies continue to drive demand for iron ore.

Market conditions remain tight, and we are quickly bringing on new supply to meet that demand.

I am approaching this year cautiously, but with a lot to look forward to.

As we continue in this year of the rabbit, I am sure our many friends in China would echo this sentiment.

Thank you.

(Ends)