Global Iron Ore Shortage Looms Due to Rio Tinto’s Delay in WA Mine Expansion

JPMorgan warned of a global iron ore shortage because of Rio Tinto's (ASX: RIO) plan to delay the expansion of its $5.4-billion iron ore mine in Western Australia. The bank reviewed Rio's plan to boost its yearly production of the key steelmaking ingredient commodity by 70 million tonnes.

Although the second-largest global miner has began building the port and rail capacity, it has not yet committed to the mine expansion, which would delay the iron ore ramp-up by three years from the current 2016 target.

As it is, Rio is expected to report this week a 2-million-tonne shortage of iron ore production for Q2 due to the rains and conveyor belt problems.

The delay in expansion plans is because Rio, like the other large miners, are reducing spending and cost due to lower demand and commodity prices in the international market.

Besides delaying expansions and slashing costs, mining companies are also reducing the compensation packages of their executives. Rio's new iron ore chief executive, Andrew Harding, axed about 50 middle management position at the company's iron ore office in Perth.

Rio, however, has other options for its mine expansion than just quickly building bigger mines to meet its original infrastructure expansion plan to boost iron ore production to 360 million tonnes from 290 million tonnes annually.

Rio planned to boost iron ore production in 2011.

"The decision to add 70 million tonnes a year of mine capacity appears to be taking longer than previously outlined by the company, suggesting Rio may be pursuing a go-slow option," The Australian quoted the report of JPMorgan analyst Lyndon Fagan.

Rio Chief Executive Sam Walsh had hinted in May that the giant miner may opt to delay hitting its production target of 360 million tonnes yearly until 2018.

These measures are expected to cut Rio's $5 billion cost.

However, New Atrium Chief Executive Andrew Roberts, in a speech at the Melbourne Mining Club, did not share JPMorgan's pessimistic outlook for the iron ore sector.

"There is continued strong growth in China, and while longer-term growth rates are expected to subside, this would still leave demand for iron ore at high levels," he said in his presentation.

"Historically, people have generally underestimated demand growth and overestimated the rate of supply coming on," Mr Roberts added.