Departing chief executives and $14-billion (U.S.) writedowns aside, Rio Tinto last week reported record iron ore production and shipments from its mines in Australia's Pilbara region in 2012. Output topped 250 million tonnes, with shipments just shy of that thanks to productivity gains. But, with other big ore bodies in Brazil coming on stream from 2015, can Pilbara's dominance last?
The quick answer is yes. Rio's decision to prioritise Pilbara capex over Simandou, its ore project in Guinea, says as much – reflecting higher returns from the former and the infrastructure complexities of the latter, where carrying ore to port is the problem. But Anglo American's Minas-Rio project in Brazil could start production in 2015. And Vale of Brazil's Serra Sul mine could follow in 2018. The scale of Brazilian production is bound to depress the ore price. No wonder Rio, which derives about three-quarters of earnings before interest and tax from iron ore, is so keen to bring its Oyu Tolgoi copper mine in Mongolia to fruition.
But the Pilbara's dominance looks assured in the long run by dint of its proximity to China. Rio's cash cost is $24.50 a tonne. Add royalties, sustaining capex and $7 a tonne shipping costs, and Rio is landing ore in China at $47 a tonne. Anglo expects to land its ore from Brazil at $55 to $60 a tonne. With a spot price of about $145 a tonne, Anglo, BHP Billiton, Rio and Vale are sitting pretty. With its fragmented industry and lower grades, China lacks the global miners' economies of scale, and so will continue to import ore.
Rio and Vale's fortunes are pegged to the iron ore price. The former, on nine times 2013 earnings, is also held back by pain at Alcan; the latter, on eight times, by the risk of meddling from Brasília. Both lag behind Anglo and BHP by a third. But Rio Tinto is closer to China than Rio de Janeiro is.