Rio Tinto Ltd.'s seeking of a new pricing mechanism for its iron ore with Chinese customers is justified given the dramatic lift in coking coal prices, chief executive Jean-Sebastian Jacques believes.
Rio Tinto is currently in negotiations with steel makers Baosteel Group and Shougang Group over a new pricing mechanism for its Australian ore, however the key customers haven't yet agreed to the terms.
Speaking via video link from Singapore to a Chinese media delegation visiting Rio's iron ore operations center in Perth, Jacques defended the company's position as steel makers manage the burden of higher coking coal prices "very carefully." Coking coal has jumped 300 percent to more than 300 U.S. dollars over the past 12-months.
"They are looking for high quality iron ore products, and therefore the demand for high quality iron ore products is very high," Jacques said.
"What Rio Tinto is doing is to say for those specific products where the supply/demand balance is unbalanced, and then the price mechanism should kick in.
"Therefore our product -- because it's helping with the managing of the blast furnace -- should attract a premium."
It's a risky proposition given Brazilian giant Vale's new S11D mine which received Brazilian regulatory approval earlier in December will ship directly to China and the sale of its 46.6 percent stake in the tier one Simandou asset in Guinea to major shareholder Chinalco Mining Corporation International.
Unlike Vale, Chinalco won't become a direct competitor into the Chinese market, Jacques believes, given financing for the project was unable to be secured in the two years prior to offloading the "world class" asset, even with some Chinese partners to pursue potential options.
Jacques is confident Rio's relationship with Chinese steel producers that's been forged since the 1970s will also be its advantage, remembering November's "pretty emotional" function in Beijing celebrating the partnership with those who signed the early contracts for the rust colored dirt.
"You could see the body language and the emotion, it was absolutely fantastic," Jacques said.
"That's really a testament of the quality of the partnership between China and Rio Tinto."
Instead, maintenance of the "value over volume" strategy and the optimization of free cash flow in an ultra-competitive and over supplied iron ore market is top priority given the unsustainable 86 percent year-to-date surge of benchmark prices to just over 81 U.S. dollars per ton.
The high prices are allowing marginal operations to come back into the system, impacting the pricing "twilight zone" where the supply-demand relationship is so close, any news whether good or bad will move the market quite quickly, Jacques said.
"The only thing that can influence (Rio Tinto) is the quality of our business which is about being low cost, providing the right quality produce, and managing the relationship with our customers in China in a very careful manner that is a win-win partnership," Jacques said, commenting on how he is approaching the high price environment.
"That's the only thing we can do, and that's what we're doing at this point in time."
Thus, progress on Rio's productivity drive to cut 5 billion U.S. dollars of costs out of the business is well underway.
Train haulage operations have cut cycle times from 42 hours to 35 with minor improvements across all sectors, such as the half-second improvement per two-car dumping cycle at Cape Lambert's train unloaders, for a 20 - 25 minutes improvement per 236-car train. Dumping constitutes 10 percent of a train's cycle, a large time improvement for the 35 trains that pass through Rio's Pilbara port operations each day.
Further advances in automation remote operation across the Pilbara is also improving efficiency by removing labor factors that impact production and transport.
Rio's AutoHaul program has also entered its next testing phase after suffering setbacks earlier this year. Twenty AutoHaul trains are currently operating on the network under driver supervision, with full program rollout expected in 2018.
It's all managed from Rio's iron ore operations center in Perth where the progression from remote operation to automation of what was previously only possible in science fiction films is becoming ever more probable over the next two decades.
These operational gains makes Rio the "best partner for China" across the company's entire portfolio, including bauxite and diamonds, Jacques said, trumpeting the giant's recently approved 10-year strategy which focuses on the Chinese market.
"We believe that Rio Tinto is the best partner for China on the back of the quality assets, the quality of the long term partnership and the quality of the technology we're deploying," Jacques said.