Rio spending $4 billion on iron ore pipeline amid China demand

London-based Rio will invest $749 million to bring the Western Turner Syncline Phase 2 project into production from 2021, according to a statement Wednesday. It will help extend the life of operations around the Tom Price mine, which began exporting in 1966.

Rival BHP Group is spending about $3 billion on its South Flank mine and Fortescue Metals Group Ltd. is investing more than $3 billion in two developments

While the new project is aimed only at replacing output that’ll be lost from aging pits, Rio will have options to boost volumes from its $2.6 billion Koodaideri development, Chris Salisbury, iron ore chief executive officer, said in a phone interview. The Western Turner project was accounted for under capital expenditure guidance outlined last month, he said.

Australia’s top miners continue to see potential to leverage low production costs and a dominant position in the seaborne trade to generate strong profits from iron ore, even as they forecast China’s steel output to reach a peak.

Demand for ore is being supported by infrastructure projects in China launched earlier in 2019 and by ongoing property development, Salisbury said. There’s also been a more limited impact from the nation’s traditional winter output curbs on steel mills intended to limit pollution, he said.

“We haven’t seen significant effects of those so far in the season,” Salisbury said. “We are pleased with the level of demand at the moment.”

Rival BHP Group is spending about $3 billion on its South Flank mine and Fortescue Metals Group Ltd. is investing more than $3 billion in two developments, including the Iron Bridge project that’ll add output of higher-quality materials. Rio last year approved the Koodaideri project and also $820 million of spending for its share of work to sustain output from the Robe River joint venture.

The latest investment by Rio highlights “the ongoing commitment toward capital required to maintain existing” volumes and product quality in Australia’s Pilbara region, RBC Capital Markets analyst Paul Hissey said in a note. Potential for an iron ore surplus from 2020 and the prospect of continued slowing in China’s economy mean RBC was cautious about the market over the medium and long term, he said.

Rio forecasts its iron ore shipments to rise as much as 5% in 2020 and expects to have capacity to hit a long-standing target for annual cargoes of 360 million tons by 2022. Iron ore accounts for about 43% of its revenue.

“Our iron ore business does continue to deliver industry leading margins,” Salisbury said. The investments are “a commitment to the importance of iron ore to the overall Rio portfolio,” he said.

Rio’s investment in the Western Turner project will add a new crusher and a 13-kilometer (8-mile) long conveyor belt, trimming the need for road haulage and helping cut the mining hub’s greenhouse gas emissions, the producer said. The plan will also protect the future of the company’s flagship Pilbara Blend iron ore product. The investment means Rio’s approved spending on new iron ore projects is more than A$6 billion ($4 billion), according to Salisbury.