Rio Tinto is running its Pilbara iron ore mines in Western Australia at record production rates and could beat full-year guidance of 200 million tonnes if demand holds up and its vast network of mines, railways and ports runs smoothly.
The Australian understands that despite the recent slump in iron ore spot prices, Rio produced about 18.5 million tonnes a month from the Pilbara in July and August, which translates into an annual rate of just over its stated infrastructure capacity of 220million tonnes.
In July, Rio confirmed its full-year global production guidance, but if the company maintains production at current rates its WA operations alone would beat this.
Yesterday, a spokesman said the July guidance remained in place.
Rio produced 91.8 million tonnes of iron ore from the Pilbara in the first half and 8.4million tonnes from Canada and Brazil.
However, demand could be a limiting factor, as spot prices threaten to fall below the provisional prices at which Rio and its potential iron ore joint venture partner BHP Billiton are selling most of their iron ore into China.
Chinese iron ore spot prices have slumped 26 per cent in the past two weeks to $US82 ($96) a tonne, prompting Rio iron ore boss Sam Walsh to question the sustainability of recent high prices.
"This (the recent fall) mirrors the changing conditions in the steel market, where large price lifts by major mills resulted in strong supply and depressed consumption -- leading to falls in Chinese steel prices," Mr Walsh said at a lunch in Perth on Friday.
"It seems prudent to exercise some caution about the scale of the recent rally in prices."
With the cost of shipping iron ore to China at about $SU15 a tonne, another big fall in spot prices could make spot market iron ore cheaper than the $US60 a tonne before shipping that Rio and BHP are charging most of their customers.
Last year, when spot prices slumped below contract prices, many Chinese mills tore up their contracts to buy on spot markets.
In this year's fraught price talks, Chinese mills have refused to lock in prices at levels agreed to by other Asian mills.
Instead, they are buying iron ore at provisional prices, which could make them even more willing than they were last year to move to exploit cheaper spot prices.
Mr Walsh also warned of extra supply from China, where producers were re-entering the market to take advantage of higher spot prices, and India, where the monsoon season ends this month.
Citi commodities analyst Alan Heap said figures showed Chinese monthly mine production had doubled to more than 80million tonnes since January. Australia's monthly iron ore exports rose to a record 33 million tonnes in July, according to Australian Bureau of Statistics data quoted by UBS.
China took about two-thirds of that.
Source: The Australian
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