Peace maker

Rio Tinto new boss can end foolish price war

Sam Walsh has achieved most of what he set out to do at Rio Tinto. The 66-year-old Australian has cut billions of dollars off costs and slashed investment as the rout in commodities prices takes its toll on the industry. But on one thing he failed. Walsh, who said on March 17 that he will retire as chief executive this summer, decided that pushing out more iron ore into a falling market would eventually kill off higher-cost rivals. His successor Jean-Sebastien Jacques has a chance to bury that foolish strategy.

Rio Tinto has outperformed its rivals since Walsh became chief in January 2013, having previously run the iron ore business. Prices of all the major commodities Rio produces have slumped. But shareholders who invested when Walsh took charge have only lost one-third of their investment. Those at rival BHP Billiton have lost nearly half, and the FTSE Mining Index has shed 79 per cent, according to Eikon data. Walsh has achieved this by making Rio admirably lean. It can produce a tonne of iron ore for less than $15 - where prices during his tenure have fallen from around $150 per tonne to $55.

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The price war Rio has fuelled hasn't done much good. Walsh thought iron ore prices below $80 per tonne would force higher-cost rivals out of business and lead to a price recovery. Rio has continued to boost production from its core Pilbara mines to around 40 per cent more than its total capacity back in 2013, despite weaker demand growth from China. Rivals have responded by cutting costs and investment or forming alliances. Fortescue recently signed a deal with Brazilian giant Vale to sell blended iron to China, as part of which the Brazilians could take a stake in their high-cost Australian peer.

Jacques will probably deliver more cost cutting. As an old-hand in copper, he may put more focus on the red metal, which unlike iron is genuinely relatively scarce. But he also has the opportunity to take Rio in a different direction by forging peace with Rio's iron ore rivals, easing off on production, and putting the company in a stronger position to grow once the downturn in prices ends.