Bloomberg News

Rio Says Higher Labor Costs, Aussie Dollar Curb Expansion Plans

August 07, 2011

Aug. 8 (Bloomberg) -- Rio Tinto Group said rising labor costs and the Australian dollar are hurting earnings and put pressure on expansion plans by the world’s second-largest mining company.

“This is a challenge we’re going to face, not just this year, but in the coming years,” Chief Executive Officer Tom Albanese said in an interview on Australian Broadcasting Corp’s “Inside Business” program yesterday. “We’re going to be suffering the dual effects of rising costs, rising labor rates and a strong currency, and that’s going to affect not only operations but also the pace and the expense on capital projects.”

Global mining companies are battling rising wages, raw material and energy bills as well as currency gains in producing countries that drive up their costs. The Australian dollar, known as the Aussie, has gained 14 percent against the U.S. dollar in the past 12 months, making it the third-best performer among the major global currencies.

London-based Rio Tinto said currency gains and costs curbed earnings as it reported first-half profit last week that missed analyst estimates.

Higher costs associated with project expansions cut earnings by $353 million while other production-related expenses including maintenance and additional labor costs reduced earnings by $182 million, Rio said on Aug. 4. Gains in the Australian dollar drove the cost of existing iron ore and alumina expansion projects $2.4 billion higher, the company said.

Tight Market

Albanese said the iron ore market will remain tight as global suppliers are under pressure to meet demand from China for the steelmaking material. China’s economy is estimated to expand by close to 9.5 percent this year, driving global growth to 3 percent to 3.5 percent in 2011, he said.

“Many producers around the world are struggling, too, with their own supply and their own growth and that’s continuing to keep tight conditions and higher prices” for iron ore, Albanese said. Rio Tinto will look for acquisitions opportunities “from time to time” while continuing to focus on expanding its own projects to boost production.

Bigger rival BHP Billiton Ltd. said in June the cost of expanding its Worsley aluminum project in Western Australia state increased by more than half to $3 billion and completion has been delayed by at least six months.

Australia’s plan to introduce a carbon tax in 2012 will add pressure to Rio’s costs, Albanese said yesterday. The government’s decision to charge companies an initial A$23 a ton of carbon dioxide from July next year before moving to an emissions-trading system by 2015 may reduce the value of the coal industry by about A$8 billion, research group Wood Mackenzie Ltd. said in a report on July 25.

‘Not the Time’

The Reserve Bank of Australia, which has cut the nation’s 2011 economic growth outlook to 2 percent from 3.5 percent, said Aug. 5 the carbon price will add 0.7 percent “to the general price level.”

The tax “as it’s currently being envisioned will just add to those cost pressures and will create more competitive challenges,” Albanese said. “Our position is that in terms of coming up with a price for carbon, our suggestion, our engagement would be that it should be gradual, it should be tested over time to make sure it’s not having a negative effect. This is not the time to experiment with an economy.”

--Editors: Paul Tighe, Jim McDonald

To contact the reporter on this story: Soraya Permatasari in Melbourne at soraya@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net


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