Rio Tinto sees China fuelling metals market

The Rio Tinto group, the world's third-largest mining company, said China's demand for metals will likely rise, underpinning high prices for commodities this year.

Mining companies globally have been hampered from expanding capacity to meet Chinese demand by shortages of labour and equipment, Paul Skinner, chairman of London-based Rio Tinto, said in its annual report filed today.

A five-year commodity rally, fuelled by China's economic boom, has led to record profits at Rio Tinto and rival BHP Billiton. Rio expected China's economic growth to average more than 8 per cent a year over the next decade, it said. "China's strong, growing demand for metals and minerals, which has been a key driver of market strength, seems set to continue,'' Skinner said. "We expect prices in 2007 to continue at levels significantly above the long-term trend. Stocks of most products have remained low, resulting in tight markets.'' 
 

BULLISH DRAGON China's rising GDP rate
Year	GDP (In Rmb bn)	GDP growth (In %)
2000	8,946.80	8.00
2001	10,965.50	8.30
2002	12,033.30	9.10
2003	13,582.30	10.00
2004	15,987.80	10.10
2005	18,232.10	9.90
2006*	14,147.70	10.70
* January to November Source: Chinability

Rio posted a 43 per cent increase in 2006 profit to a record $7.44 billion, as Chinese demand drove up prices of copper and iron ore. The Asian nation is the world's largest consumer of coal, steel, iron ore, copper, aluminium and zinc.

Shares in Rio Tinto, dual-listed in Australia and the UK, rose 34 cents, or 0.5 per cent, to A$74.84 at the 4:10 pm close in Sydney. They had risen 10 per cent in the year before today, compared with a 15 per cent gain in the Morgan Stanley Capital International World Index.

Rio gets 16 per cent of sales from China, whose economy has grown at least 10 per cent annually from 2003. Prices of copper jumped to a record last year, helping Rio achieve an average price of 306 cents a pound ($6,746 a tonne) during 2006, 84 per cent above the 2005 average, the company said last month.

Cash prices for copper, used in pipes and wires, have averaged $5754.50 a tonne on the London Metal Exchange this year. Iron ore prices will rise 9.5 per cent from April to a record.

"Because of previous under investment in exploration, the next generation of large, world-class deposits is only now being identified and evaluated,'' Leigh Clifford, Rio's chief executive officer, said in the report. "These deposits are often in remote locations, present new technical challenges and will take some years to come into production.''

Rio agreed last year to invest $303 million in Ivanhoe Mines, a Canadian company that plans to mine copper in Mongolia. Other copper projects Rio has under study include Resolution in the US, La Granja in Peru, and Pebble in Alaska, Clifford said, calling them "world-class undeveloped copper mineral deposits''.

The Resolution project in Arizona may cost $2.5 billion to develop, Rio said in its annual report. Rio, which owns 55 per cent of the project, said mining is unlikely to start until 2015," an indication of the long lead times for challenging projects,'' Rio said. The study to develop the mine may cost as much as $700 million. The La Granja project won't start production till for at least seven years and the Pebble project is "still in its early stages'', the report said.

Clifford said building a new project means the company knows what it will get compared with an acquisition in which "you may find not all the assets are jewels''.

Shares of Alcoa, the world's largest aluminium producer, rose the most in almost four years on February 13 after 'The Times of London' said Rio Tinto and BHP Billiton were planning bids.

Rio also said the cost of its Madagascar titanium dioxide project has increased by less than 10 per cent to $850 million because of higher raw materials costs and "foreign exchange pressures.''