Rio Tinto's spending cuts put mining in a deeper hole

 

The mining industry’s prospects deteriorated further today after Rio Tinto said a lethal cocktail of rising costs and falling prices would force it to cut spending by $7 billion (£4.4 billion) over the next two years and warned of further writedowns on its aluminium business.

But shares soared by 4 per cent as investors welcomed the FTSE 100 mining giant’s move to tackle their concerns about its bottom line, amid a gloomy outlook for the industry.

Rio’s coal and aluminium operations will bear the brunt of the cuts because they have been hit hardest by the combination of depressed commodity prices and rising labour and equipment costs which resulted from an industry-wide dash into new projects in the run-up to a global downturn that has since hammered demand.

In the week after rival Xstrata finally clinched shareholder and European regulator approval for a £56 billion merger with commodities trader Glencore, Rio Tinto chief executive Tom Albanese struck a gloomy note for his company and the industry.

“For me the theme for this year, next year and probably the extended period beyond will be cost control,” he said. Albanese forwent his bonus last year after writing $8.9 billion off his disastrous acquisition of the Alcan aluminium business.

Charles Stanley analyst Tom Gidley-Kitchin said: “The situation in the mining industry has deteriorated in the past year and the prospect of recovery has moved further out. Things are still clouded by huge uncertainty in the US, China and the eurozone. Putting a time on when the situation will improve at this point would be misleading.”

The aluminium price has fallen 14% since the beginning of March, as the industry continued to suffer from huge overcapacity. Meanwhile, the price of thermal coal, used to generate electricity, fell to a three-year low this month as the US boom in shale gas continued to see coal-fired power stations switching to gas and the excess coal exported instead.

Iron ore, an essential in steel-making — which has declined by more than a fifth since its 2012 high — is also suffering as the Chinese construction boom runs out of steam. The metal accounts for about four-fifths of Rio’s profits, although the group said that the revenue blow will be cushioned by an increase in production.

Rio’s cost-cutting continues a trend among mining companies. Archrival BHP Billiton scrapped a planned A$10 billion (£6.5 billion) project in August and has put on hold a $A20 billion expansion of its Olympic Dam mine in South Australia. Rio shares rose 120.0p to 3060.5p.

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