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Rio Tinto: Metals Prices Unlikely To Rebound During 2009

djones


SYDNEY -(Dow Jones)- Metals prices are unlikely to stage much of a rebound
during 2009 because of a large stock and production capacity overhang despite an
expected improvement in demand over the course of the year, Rio Tinto PLC (RTP)
said in its annual report Tuesday.


"Whilst the precise shape and length of the current downturn is uncertain,
economic activity continues to decline and forward indicators suggest any
recovery is unlikely to begin until the second half of the year," Rio Tinto
said.


"Prices seem unlikely to be able to stage much of a rebound during 2009," the
company said, tipping Chinese metals demand growing only at a single-digit rate
in 2009.


That compares with the over 20% rates of growth in recent years, and the
growth won't be enough to offset a much bigger decline in consumption in other
markets, Rio Tinto said.


Prices for base metals plummeted to multiyear lows last year on the back of
contracting industrial output and limited access to credit. London Metal
Exchange copper prices for instance more than halved, and have since been
trading below US$4,000 a metric ton.


The broad pullback has weighed many metals prices below the operating costs of
marginal producers, leading to shutdowns across the industry.


"This suggests that further downside risk to prices is becoming limited," Rio
Tinto said.


But while prices look unlikely to go much lower than their recent rock bottom
points, the company said even when a recovery does take place the strength of
the upturn may be muted.


"Recessions associated with reduced credit and declines in house and equity
values are typically deeper and are longer than other downturns. Deleveraging of
balance sheets, the need to rebuild savings and for governments to eventually
rein in ballooning fiscal deficits will restrict future rates of growth," Rio
Tinto said.


In China, which accounts for one-third of commodity consumption, growth came
to a standstill towards the end of 2008, leading to market commentators slashing
projections for this year.


And while the central government's aggressive response via a CNY4 trillion (
US$585 billion) stimulus package last November targeted metals-intensive public
infrastructure spending, Rio Tinto said "there are significant headwinds from
weaker export demand. An inventory overhang is expected to hold back any
immediate recovery in housing activity."