In the second half of last year, international commodity prices rebounded, particularly with iron ore prices rising in the fourth quarter, boosting the financial performance of major international mining companies—including the Anglo-Australian miner Rio Tinto.

　　Iron ore prices have risen from less than $40 per ton at the beginning of 2016 to over $92 per ton currently. Rio Tinto’s net profit surged dramatically from a loss of $866 million in 2015 to a net profit of $4.617 billion in 2016.

　　Jean-Sébastien Jacques, CEO of Rio Tinto Group, is visiting China for the second time this year. He chaired the “Belt and Road” sub-forum at the “China Development High-Level Forum 2017,” held from March 18 to 20.

　　The “China Development Forum,” hosted by the Development Research Center of the State Council, was first established in 2000.

　　In the afternoon of March 17, Xie Jisi told media outlets, including reporters from Interface News, that last year, 43% of Rio Tinto’s revenue came from China, and Chinese steelmakers are seeking even more iron ore from Rio Tinto. Last year, Rio Tinto’s revenue totaled $33.8 billion. 　　

The three major mining giants—Rio Tinto, BHP Billiton (the Anglo-Australian miner), and Brazil’s Vale—are China’s primary exporters of energy commodities, especially iron ore. More than 80 percent of China’s iron-ore needs are met through imports; last year, China imported 1.024 billion tons of iron ore, an increase of 7.5% over the previous year.

　　Mining tycoons generally don't provide explicit forecasts for commodity prices. On the one hand, this involves trade secrets; on the other hand, it’s also related to certain factors that are difficult to control.

　　Xia Jiesi believes that four factors can influence iron ore prices, three of which are related to China.

　　He said that the primary factor influencing iron ore prices is China’s economic situation. He isn’t worried about China’s economic development, because the Chinese government continues to strongly support investment in infrastructure construction.

　　Two factors influencing iron ore prices are the reforms underway in China’s steel industry. China is implementing a “capacity reduction” policy, having already cut 65 million tons of excess capacity in the steel sector in 2016 and planning to further reduce another 50 million tons of excess capacity this year.

　　Xia Jiesi believes that capacity reduction—driven by considerations of environmental protection and productivity enhancement—is not equivalent to output reduction. On the contrary, capacity reduction will encourage Chinese steel mills to increasingly favor high-grade ores like those from Rio Tinto, which is beneficial for Rio Tinto itself.

　　He visited many Chinese steel mills and found that China’s current blast furnace utilization rate remains at 70% to 75%. “If some small, inefficient, and highly polluting blast furnaces are shut down while large, efficient ones continue operating, the impact on actual production won’t be significant.”

　　Xia Jiesi believes that the third factor is market supply. The S11D project—the largest iron ore project in Vale’s history, with an annual output of 90 million tons—has come on stream, adding to this year’s market supply. Xia Jiesi estimates that a total of 40 million tons of new iron ore will enter the market this year. However, since news of the S11D project’s commissioning had already been widely known, the market has already factored in this expansion. As a result, the impact of increased supply on iron ore prices will not be particularly significant.

　　The only factor that the major players cannot grasp is China’s domestic mine production.

　　Xia Jiesi said that several years ago, China’s domestic mine production was quite substantial, reaching about 400 million tons annually. “Now, according to our estimates, it’s probably around 270 million tons. With iron ore prices on the rise, will Chinese mines resume production? It’s really difficult for us to predict whether China’s output will actually increase or decrease. As far as we’re concerned, the first of these four driving factors is not a problem, while the last one is relatively hard to forecast.”

　　He believes that last year’s rise in iron ore prices was mainly due to China’s demand for iron ore significantly exceeding expectations, and China’s economic growth rate also turned out to be better than previously anticipated by the market.

　　“The Chinese government has also introduced stimulus policies and made substantial investments in areas such as infrastructure development,” said Xia Jiesi. At the beginning of last year, housing inventory in China’s first- and second-tier cities reached a level of 20 to 25 months; however, by the end of the year, it had fallen back to a level of 6 to 7 months.

　　The reduction of housing inventory has boosted demand for steel, which in turn has increased the need for iron ore raw materials. “Because demand is relatively high, prices for (iron ore) were quite favorable last year,” said Xia Jiesi.

　　Regarding the issue of whether Chinese steel mills are hesitant to sign contracts after Rio Tinto and several Chinese steel mills renewed their long-term supply agreements at higher prices late last year, Xia Jiesi believes this involves confidential commercial contracts with partners and that it would be inappropriate to disclose specific details.

　　However, he said: “Three weeks ago, when we visited China to inspect the steel mills, their top priority was for us to sell them more ore—price wasn’t even a factor. So, for me, the most pressing issue is that they (the Chinese steel mills) are hoping we’ll increase our supply volume. But our production capacity is very limited, and we simply can’t meet their demand. That’s what worries us the most.”