×

Rio Tinto on track to meet FY iron ore guidance, as analyst says prices may 'surprise on the upside'

Mining giant Rio Tinto said it was on course to meet its full-year iron ore shipment guidance from its Australian mines, underscoring robust Chinese demand despite concerns about steel overcapacity.

Rio expects to ship 330 million metric tons of the steel-making ingredient in the 2016 financial year, the miner said on Tuesday.

"Demand for these raw materials is still very strong," Martin Place Securities executive chairman Barry Dawes told CNBC's "The Rundown."

"Imports into China are still at record levels; they haven't fallen away and consequently companies are able to deliver everything they can produce,"

In second-quarter production results released on Tuesday, Rio Tinto said its 80.9 million-ton Australian production total for Q2 was 8 percent higher than the same period a year ago and 1 percent up on the previous quarter.

According to Thomson Reuters Commodity Research and Forecasts, about 92 million tons of iron ore will arrive at ports in China in July, the highest monthly level so far this year.

The world's second largest economy accounts for some two-thirds of the world's purchases of seaborne iron ore, but China has admitted that there is massive overcapacity in its steel industry and has put in place targets for production capacity cuts over the coming five years, which would have been expected to hit demand for iron ore.

Michael Nagle | Bloomberg | Getty Images

But Reuters reported in May that China's efforts to cut its steel output had been complicated by a recovery in domestic steel prices.

And Dawes said local iron ore production falls were helping prop up demand for foreign supply.

"The story about overcapacity in China is only half right," Dawes explained, noting that domestic iron ore production China had dropped by 150 million tons in the past 18 months, which meant that Chinese iron ore buyers were looking abroad for lower-cost supplies from more efficient producers.

China's iron ore imports jumped 9.1 percent to 493.7 million tons in the first half of 2016 from the same period a year ago, Reuters calculations showed.

Dawes said iron ore prices may "surprise on the upside" in the next 12 months as producers improve output efficiencies.

Iron ore prices averaged $55.96 a ton in the second quarter of the year, up from $48.75 in the first quarter.

BHP Billiton is due to release its Q2 production numbers on Wednesday.

Follow CNBC International on Twitter and Facebook.