Uncertainty growing for resource commodities: Rio Tinto CEO
Brexit and Trump presidency could weigh things down
TOKYO -- Since the end of the so-called commodity supercycle at the turn of the century, the world has entered an age of low growth, explained Jean-Sebastien Jacques, CEO of Rio Tinto, the Anglo-Australian mining company, in an interview with the Nikkei.
Q: The spot price of coal, the material to make steel, has more than tripled since the start of the year to $300 per ton. The price of iron ore has also risen in step with rising coking coal prices.
A: In coking coal, the key driver for the price recovery is the fact that the government in China has decided to reduce the production to 276 days per year. And therefore, supply has been reduced and the price went up. The Chinese government has put lots of money into the system and, therefore, as an example, the construction market is much, much better. One of the metrics that we monitor very carefully is the inventory of unsold property in China. At the peak, it went above 20 months and currently we're at seven months, which we regard as a healthy level in this kind of market. We are very close to a balance situation with one exception, aluminum. As supply and demand are very close we don't need a lot to tip the price in the right direction. We have seen a recovery [in coking coal prices]. The government in China is already talking about increasing the number of days of production back to 330 days per year. And as a result, we would expect prices, at some stage, to be under pressure again.
Q: Have the prices of resource commodities bottomed out?
A: We just spent the last two days in Tokyo to meet with people -- customers or suppliers or partners -- and it's fair to say that the mood is better than it was six months ago. So the mood is better. Perception is very important. And if you look at, in the context of the relation of [U.S. President-elect Donald] Trump, there's been some positive momentum as a lot of people were expecting to spend a lot of money to beef up infrastructure in the U.S. and therefore drive demand.
So we had a good run in the last six months on the back of ... demand. We believe the level of uncertainty has increased. Nobody knows exactly what will happen and when. [As for Trump], there could be some positives and negatives. And maybe the most important [thing] in the context of the mining business is the pace of the restructuring of the SOEs [state-owned enterprises] in China. China accounts for more or less 50% of the [output] of the mining industry. So China is absolutely essential for us.
Q: In the last couple of years, there has been some rationalization in terms of global iron ore supply. Have you seen that sort of trend settled?
A: Yes and no. Yes, some people have exited the market, but at the same time, you've got new capacity coming on-stream. But the real source of uncertainty is the iron ore production in China. A few years ago, China produced [about] 400 million tons of iron ore. We believe at the beginning of this year the annualized run rate was [around] 230. But we believe today we are closer to 270 million tons.
Q: Do you expect any changes to your plan in terms of reviewing your business portfolio and asset portfolio?
A: When we look at the portfolio, we look at the portfolio on the basis of long-term fundamentals. We will sell our noncore assets for the right value at the right point in time. We sold [a] small aluminum smelter in the U.K. for slightly more than $410 million. We will continue to grow in the areas that we believe are the most attractive for Rio Tinto, both in terms of commodities and in terms of quality of assets. We have three main growth projects. One is called Silvergrass, which is iron ore in Pilbara, to improve the quality of our iron ore products. The second one is a project called Amrun, which is about producing high-quality bauxite, from Australia, to supply mainly the aluminum industry in China. And the third one is about copper and gold in Mongolia.
We [mining companies] have experienced what we describe as a "supercycle," where the growth was really fast. And that's why everybody, including Rio Tinto, [grew] very fast. Now we are moving to a situation where it's gotten mature. The mining industry is absolutely lagging behind in terms of productivity compared to the automotive or oil and gas. [Our focus is] value over volume. We want to beat the competition by having the right portfolio, assets, the right balance sheet. And one of the key drivers is going to be about what we call big data [and] artificial intelligence.
Improving the capability of our system will be a key driver for us to make a better business. we've got 960 big mining trucks, each equipped with 45 electronic tags generating data every second. The question is how we convert it into insight to drive the business a better way. The challenge we have given to [our] teams is to increase our cash flow by $5 billion in the next five years.
It was exactly 50 years ago that we had the first shipment of iron ore from West Australia to Japan. And 50 years ago, we did open the Japan office as well. It's very important in this kind of context that we develop even stronger relationships with our customers.
Q: Your company has a headquarters in London. Do you have any plan to move the headquarters out of the U.K.?
A: Today, the answer is no. We are listed in Australia and the U.K. and 80% of our shareholders are in the U.K. So I think it's important for us to remain in the U.K., close to our shareholders. However, we are monitoring the situation very carefully. We fully acknowledge that Asia -- China, Japan, [South] Korea -- is our largest market. We are putting more resources in Asia to better understand the need of the customers. And that's why we are strengthening our sales and marketing capability out of Singapore.
Interviewed by Nikkei senior staff writer Tomio Shida.