Rio chief downplays seaborne iron ore surplus story

A large surplus is unlikely to emerge in the seaborne iron ore market this year in spite of increased output from mines in Australia, according to the chief executive of Rio Tinto, the FTSE 100 mining group.

Speaking after the release of annual results in London on Thursday, Sam Walsh said forecasts by analysts for a 90m tonne surplus were likely to prove too pessimistic and could turn out to be "less than half that".

While the "numbers" showed the market "trending to a surplus", Mr Walsh said a number of factors were likely to impact supply, including weather events in Australia and Brazil and some of the new capacity not coming on as "strongly" as expected.

High cost Chinese production was also being "impacted" by cheaper seaborne supply, he said.

"The best way of describing it [the market], is steady as she goes. It's not something we are overly worried about," he said. "But clearly as we bring on expansions we do have the ability to match those to the market. "

Iron ore prices averaged $135 a tonne last year, up 4 per cent on 2012, as a much feared wave of fresh supply failed to materialise and Chinese steel output rose by a larger-than-expected 7.5 per cent.

It was one of just a handful of commodities that saw a year-on-year increase in prices and its performance was in stark contrast to industrial metals such as aluminium and zinc, which saw average prices sink by 8.6 per cent and 7.8 per cent respectively.

However, many analysts believe 2014 will be the year in which supply finally overwhelms demand growth in China, the world's largest buyer of seaborne iron ore. Analysts estimate more than 100m tonnes of new supply, the majority from mines in Australia, will hit the 1.3bn tonne a year market in 2014.

Prices have already broken out of the $130-$140 a tonne range they held for several months at the end of last year. The benchmark price fell to a seven-month low of $120 a tonne earlier this week amid concerns about slowing economic growth in China and a credit squeeze that has prevented steel traders in the country buying ore.

However, Mr Walsh said the miner had not "seen" an impact on its volumes, adding that an increased focus on the quality of ore in China was good news for companies like Rio, which produce high grade lump and pellets as well as iron ore fines.

Premiums for high quality iron ore have risen sharply in recent months following an environmental clampdown in China. Steel mills are under pressure to reduce the use of sinter plants - where iron ore fines are mixed with coking coal and partially smelted before being added to blast furnaces - because these are a major source of sulphur dioxide. As a result, steel mills are using more "direct charge" products such as pellets and lump in their furnaces.

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