Following is the transcript of a CNBC interview with Jean-Sebastien Jacques, CEO, Rio Tinto. The interview was broadcast on CNBC on 20 March 2017.
All references must be sourced to a "CNBC Interview".
Interviewed by Geoff Cutmore, Anchor, CNBC at China Development Forum 2017.
Geoff Cutmore: So what we have now is the new set of growth targets for the Chinese economy, are you concerned or otherwise, that we still continue to see the glide path, still lower growth rates for China?
Jean-Sebastien Jacques: So let's be clear, if you ask me if I'm concerned about China the answer is absolutely no for 2017. Remember we are supplying lots of products to China: copper, iron ore for steel, bauxite for aluminum, even diamonds, so we have a pretty good understanding of what the situation is in China. And today when I look at our order books, I've got no concerns whatsoever.
GC: What's your broad sense of the demand picture then for full year 2017 and running into 2018?
JS: So I can only make comments on 2017, we're still in March as we can see today. As I said, no real concern for 2017. If I look at the latest set of metrics that were issued disclosed last week in relation to infrastructure, properties, construction, all the indicators are moving in the right direction, and it's totally consistent with the quality of the order books that we are experiencing. On top of it, I mean I can give you an example, three weeks ago we were already in China and we went to visit our customers in the Shanghai region and their order books are pretty full as well, so at this point in time, no real concern.
GC: The Chinese government itself has talked about scaling back some of its own industry, in a way of addressing some environmental concerns. How do you think that changes the supply picture globally, and what will it mean for Rio?
JS: So let's focus on the key market for us, which is still the steel industry. There is no doubt that they will restructure their steel industry on the back of pollution issues for example. However, that doesn't mean they will reduce the steel output. So they will shut down the smaller, less-efficient, more-polluting blast furnaces, but at the same time they will refocus all their production on the newest, largest blast furnaces. Now what it means for us, it could be a very good piece of news, lots of opportunities, and the reason why it is, in order for them to produce exactly the same output, they will have to buy higher quality raw material and that's a great piece of news for us.
GC: What do you think is going to happen to the iron ore price from here? I mean we've seen +$90 a ton, do you think that's sustainable?
JS: Very good question. Let me share with you, there are four key drivers in relation to the price formation of iron ore. The first one, that we just discussed is the health of the Chinese economy - no concerns for 2017. The second one is about the steel restructuring in China, and as I said that could be good opportunities for us, not only in terms of volume, but in terms of quality. The third one in the price formation is about additional capacity, iron ore capacity in Brazil, in Australia but I believe it's already fully reflected in the price. Now the fourth driver which is the key source of uncertainty, and therefore potential volatility, in terms of iron ore prices is in relation to the iron ore production in China. Three years ago they used to produce above 400 million tons, at this point in time, our base view is about 270 million metric tons. It's still winter in China, it's going to be interesting to see what may happen as we get into summer months - are they going to restart some of this capacity? Depending on this decision, it may have an impact on the iron ore prices.
GC: If I boil that down to a single straightforward answer, ultimately you think there is some vulnerability in current price levels?
JS: I would say that there is a risk of volatility. Now, the so-what for Rio Tinto is that we don't control prices. The only thing I can influence is what I do within my system which is about making sure I'm low-cost, making sure I've got the right quality of product, making sure I've got the right relationship with the right customers in order to make sure that whatever happens in the marketplace I can generate cash flow and therefore pay dividends, share buybacks to my shareholders. That's what we are focusing on.
GC: Remarkable year 2016 for the recovery in all extractive industries, both in the base material price and indeed in share prices of companies, you've benefited from that as others have. A lot of that was about the belief about the Trump reflation trade. We now have a Trump administration and I think people are beginning to get a little bit skeptical about the ability of Donald Trump to deliver on his promises around infrastructure spending particularly in the light of the budget. How would you describe your view of what this administration can deliver?
JS: With a team, we were in the U.S., we spent a full week in New York, Boston and Washington D.C. last week. We had the opportunity to meet with some key influencers and key decision makers of the Trump administration. I think it's early days and I think it's going to be important to judge them on their actions and not only on words so early days but it could be very positive.
GC: Still when you think about the unpicking of NAFTA perhaps and some of the concerns around trade frictions, you still hold that view?
JS: We never really expressed any concern in relation to NAFTA. For us, NAFTA is really about the relationship between Canada and Australia, I mean, Canada and the USA, Australia is very important for us as well. So when you look at the relationship between Canada and the USA - yes, Canada is exporting lots of product, at the same time the USA is importing lots of products including some electricity, a big chunk of New York State is powered by a power station in Canada. So I think it's pretty balanced and therefore I don't have a big concern today.
GC: You, like many other companies in the space, have embraced self-help to turn around the over investment that was taking place ahead of, and after, the global financial crisis. You've focused on this value over volume theme for the company. Can you help us understand what that might do in terms of supercharging margins over the next two or three years here, and what ultimately happens with CapEx. Is there a tipping point where you can stop thinking about running down CapEx and actually start reinvesting aggressively?
JS: Well a few points here. First of all is, we are still investing at this point in the cycle, we are one of the very few miners that can do it because of the strength of the balance sheet. So this year we're going to invest five billion dollars. We are investing in three main projects; one is the iron ore in the Pilbara in Australia to supply China and Japan for example. The second one is about big bauxite, 1.9 billion dollars to supply the aluminum industry in China and the third one is a large project in Mongolia called Oyu Tolgoi, which is about copper and gold to supply the industry not only in China but in Japan and in Korea. So we are still investing at this point in the cycle. However we invest in a very focused way, we invest in assets that will be really world class. What we mean there, assets which are low cost, large with multiple opportunities in terms of growth, and therefore whatever the market conditions are, we will be able to generate cash flow to pay dividend and provide share buyback for our shareholders.
GC: But has the market fully understood the potential for an explosive improvement in margin from here given that you continue to drive down costs in the business. But the headline price of what you're selling to the market continues to go up?
JS: You know I've been on the road show for three weeks on the back of our results and I think our shareholders in China, in Australia, in the USA where I was last week, or in London, fully understand our value over volume and they are very supportive.
GC: Let me ask you then just to wrap up. Is there anything new you can tell us about the ongoing investigation around the Guinea fraud?
JS: So in relation to Simandou, you know that it's currently within the relevant agencies in Australia, in the U.K., in the U.S. and therefore I'm absolutely limited in what I can say. Now, what I can tell you for a fact is I take personally integrity very seriously and I can make sure that wherever we operate we'll do the right thing.
GC: And does Sam Walsh get his bonus in the end?
JS: It's not for me to discuss at this point in time you saw the agreement which is a deferral in order to buy more time to understand better the situation. And in due course people, the rem committee of Rio Tinto will make an assessment.
GC: But you have to give your shareholders some guidance on when they can draw a line under this as an issue for the business. When do you think that clarity will come?
JS: I cannot give you any indication about the timetable, but what I can tell you is we are very clear that we will have to inform our shareholders as we can do so. And you saw the annual report that was issued three weeks ago that we did provide an update on the basis of the information that we have at that point in time so that's where we are.