Thursday, September 15, 2005

Rio Tinto Says Oil Prices to Affect China's Demand for Commodities

September 15, 2005 4:59 a.m.

SHANGHAI – China shows no sign of letup in its appetite for commodities such as iron ore, but high energy prices are among the threats to global growth that could yet impact demand, according to resources giant Rio Tinto PLC.

Paul Skinner, chairman of the London-based company, said Thursday that his customers in China are particularly eager to secure long-term supply of inputs like iron ore and suggest less concern about possible short-term economic hiccups.

Yet, he added, Chinese demand for inputs to run its factories will be dictated mostly by the trends in the world economy. "Unquestionably the level of oil and energy prices currently is something that does pose a threat to global growth," he said.

Rio Tinto's board of directors has spent this week in China, fitting in visits to four large steel producers spread around the country. "The customers were talking about their expansion plans and their demand for high quality iron ore," said Chief Executive Officer Leigh Clifford.

China has emerged as a bellwether for global commodity prices due to a voracious appetite for materials like the iron ore used in steel making that Rio Tinto mines in Australia. China's fixed asset investment in areas like energy and transportation projects has lost some momentum this year but remains at super-strong levels, up nearly 29% in August from the year earlier, the government said Thursday.

In a sign of their confidence about the growth, Chinese companies are increasingly eager to lock up supply by taking equity in foreign mines -- in the same way state companies have moved to buy oil production sources in the U.S., Canada and South America.

But Rio Tinto officials said that aside from their two existing joint ventures with Chinese steelmakers they are resisting equity participation in iron-ore projects. "Our message is mining is our business," Mr. Clifford said. "We're not seeking to invest in the steel industry."

China's own surging metals production has weighed on global steel prices this year. Rio Tinto management said demand for their products from China remains extremely robust in the short term.

The company last month exported its 400th ton of iron ore to China after 30 years of business in the country – though 60 million tons of that was in the past year alone. China accounts for a 15% and growing share of Rio Tinto's global revenue, which amounted to over $9 billion in the first half.

Energy is pinching the company, however. Of the $180 million in cost increases it reported for the first half, Mr. Skinner said, some $60 million was in the form of higher charges for running the trucks and trains used to move its resources. Officials declined to forecast prices for iron ore in the coming year after a 71.5% rise in the benchmark selling price applied to China earlier this year.


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