The Slashes and Sell-Offs of Rio Tinto

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By The Daily Reckoning Australia | December 3, 2012 1:07 PM EST

While our political leaders push, shove and bicker like stupid kids in a playground, signs of a weakening economy continue to mount. Yesterday, Rio Tinto told investors it plans to slash $5 billion in costs by 2014. Mining services companies duly suffered more share price falls.

East coast coal mines are in the firing line. Falling prices, a strong Aussie dollar (meaning AUD price falls are even worse) and high labour costs are damaging the profitability of these once powerful profit engines.

Rio might be a 'diversified miner', but it's really all about iron ore. It's other large divisions, coal and aluminium, are increasingly becoming marginal producers, with more mine closures becoming a reality.

The US shale gas revolution is a major culprit. Plentiful gas supplies in the US are serving to weaken demand for coal. As a result, US coal producers are pushing more coal into the export market, competing directly with Australia's once low cost, but now increasingly higher cost, product.

Ironically, Rio sold off its US coal assets in 2010 through the formation of Cloud Peak Energy, and the Australian Financial Review reports that the company has 'stepped up plans to invest in infrastructure to sell more coal to Australia's markets in Asia as costs rise.'

On top of that less than upbeat news from Rio, the Australian Bureau of Statistics reported yesterday that companies have scaled back their capital spending plans to $173 billion, from estimates of $179 billion just three months ago. Now that might not seem like a big deal, but as The Australian reports:

'"It is very rare for companies to cut their investment forecasts at this early stage of the financial year and has only previously occurred in 1991 and 1974," Barclays chief economist Kieran Davies said. "There is still going to be an enormous lift in resource investment, but there has been an unambiguous downgrade."'

Hmmm...1991 and 1974 he says...weren't they the years of nasty recessions?

Of course, Australia is not going to have a recession in 2013. We've got the world's best treasurer at the helm, and fine leaders punching on behind the toilet block, and there are always interest rates cuts. After all, the old zero interest rate ploy has worked a treat in Japan, the US and Britain.

Regards,

Greg Canavan
for The Daily Reckoning Australia

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The article was first published by The Daily Reckoning Australia

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