China's economy is a key driver for Australia's miners like Rio Tinto (NYSE:RIO). Rio, the world's second-largest mining firm, is mostly in Australia and North America, but it also operates in Europe, South America, Asia and Africa.
Rio counts on iron ore for more than two-thirds of its revenue. The company's global iron ore production was 68.3 million metric tons in the third quarter of 2013, increased 2% from a year earlier. Iron ore shipment grew 4% during the same period. China, the world's biggest importer of the steel making raw material, is Rio's biggest customer. China's economy is showing signs of recovery, led by a bounce in its exports and industrial sector. The country's iron ore imports surged to a fresh record in September, driven by robust steel production.
In September, China imported 74.58 million tons of iron ore, up 8% from August and 15% from a year earlier. China's steel consumption is expected to increase by 5% to 703 million tons in 2013. According to forecast, China will import 831 million tons of iron ore in 2013 and 872 million tons in 2014, up from expectations of 774 million tons and 805 million tons in June. The Bureau of Resources and Energy Economics said Australia may ship 570 million tons of iron ore in 2013 and 669 million tons in 2014. Many experts said that iron ore consumption by China will reduce in the future due to increase in metal scrap supply, but use of scrap is expected to decrease this year due to policy and financial reasons.
The Chinese government plans to close almost 2000 small coal mines by the end of 2015. The decision to shut down coal mines has been taken in an effort to improve safety standards in the industry. The closures will target mines with an annual output below 90,000 tons, as well as those with lower quality coal or questionable safety records. China's dependence on imported iron ore is above 60%. Closure of coal mines will increase China's reliance on imported iron ore. By 2015, China's top steelmakers are expected to control 60% of the world's output of steel, which will also increase iron ore imports.
Rio changed its focus from growth to cost cutting and capital management. The company plans to reduce its operating costs and long-term debt in order to increase shareholder return. Rio aims to reduce its operating cost by $2 billion in 2013 and further $3 billion in 2014. The company achieved cost savings of $1.5 billion in the first half of 2013 and a further $500 million flagged for the six months to December. Rio plans to shift about 290 million metric tons on its rail network in 2014. According to Deutsche Bank AG, this shift will be a key driver for cost cuts in the company's iron ore unit. Deutsche Bank said the company's goal is to reduce cost from $23.10 a ton in the first half of 2013 to $15.60 per ton by 2020.
Mining companies have invested billions of dollars to increase output. Rio also plans to expand its iron ore production during the next five years. The company opened new facilities in the Pilbara region to boost yearly iron ore output from 220 million tons to 290 million tons, and the expansion from 290 million tons to 360 million tons in the same region is underway. Rio is now focusing on selling non-core assets and making its current operations more efficient.
In the global market, demand for iron ore is increasing. Rio has good management, strong fundamentals, and high expectations that are enough to send the price higher in the coming few months. If China's demand for iron ore increases as expected, the future of the company is bright. I recommend investors buy Rio Tinto based on longer-term growth prospects.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.