Ups production as demand falls

Rio Tinto runs the second-largest iron-ore export business in the world, largely from Australia where it has 15 mines, four port terminals and runs the largest privately-owned railway in the country. And ideally, it should have been worried with the lower prices and even lower demand. This would have logically called for a cut in production but Rio Tinto is doing the exact opposite – it is jacking up production.

The figures tell it all. Iron ore prices have fallen over 60% since Jan’14 which in turn has led to many mines closing down and mining companies cutting down labor. Rio Tinto itself showed a 12% (QoQ) drop in iron-ore shipment. Despite these facts, the company has stated that though 2015 has begun on a weak note, it will continue with its production and meet the set target of up to 350 million tonnes by end of this year, which as such is higher than 2014 target of 304 million tonnes.

Rio justifies its decision of increasing production even if demand is low by stating that if Rio cut down on production, others will hike up their production; so why give away the baton to others? It is because Rio is so huge that it can continue to produce as per its pre-set target despite economic conditions; smaller companies have either wound-up or are on the verge of closure.

On iron ore prices, metal analysts expect prices to come down further notwithstanding the 30% drop since Jan’15.  And more than anything else, it affects Australia deeply, in all areas of its economy, right from government tax revenues to consumer spending.