Rio Tinto’s asset sales may show bearish commodity outlook – by Clyde Russell (Reuters U.K. – April 8, 2013)

http://uk.reuters.com/

LAUNCESTON, Australia, April 8 (Reuters) – The lengthening list of assets being put up for sale by Rio Tinto shows the world’s second-largest miner is serious about cutting costs and exiting non-core businesses, but what does it say about the state of commodity markets?

Coal and copper assets in Australia and iron ore in Canada have reportedly been added to the for-sale list, joining diamonds in Canada and aluminium smelters around the Pacific.

So far the company is winning praise from analysts for the focus of new Chief Executive Sam Walsh on increasing returns to shareholders through a relentless focus on containing costs, paring back capital expenditure and asset sales.

While the first two present challenges, they are likely to produce far more tangible results than the planned sale of a grab-bag of high-cost mines and aluminium smelters.

The logic here is simple: if Rio, with all its deep experience of developing and running such assets, can’t make them work, why would anybody else take them on?

Also, it would be very unusual for a company to sell strongly performing assets in markets it thought held great long-term potential, even if they were high cost.

Among the assets said to be for sale is a chunk of Rio’s 80-percent controlling stake in Coal & Allied, which produces mainly thermal coal in Australia.

While it may well be a high-cost miner compared to rivals, would Rio be keen to sell down its stake if it believed thermal coal was going to be a top performer in coming years?

Certainly thermal coal has been a poor performer in recent years, with the benchmark spot price at Australia’s Newcastle port, at $87.01 a tonne, some 36 percent lower than the post-2008 recession peak of $136.30 reached in January 2011.

The price decline has come even as China and India import record amounts of the fuel and can mainly be attributed to a surge in exports from the United States and increasing supply from traditional producers such as Indonesia.

CHINA MODERATING

It would appear that Rio is taking a view that thermal coal isn’t likely to be a strong performer over the longer term, which may be a reflection of the likelihood of slowing demand growth in China as its economic growth matures and pressure mounts for cleaner-burning fuels to combat pollution.

For the rest of this article, please go to the Reuters U.K. website: http://uk.reuters.com/article/2013/04/08/column-russell-rio-assets-idUKL3N0CV0DS20130408

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