Commodity markets April 2008 Vivek Tulpule Chief Economist
Cautionary statement Cautionary Statement This presentation has been prepared by Rio Tinto plc and Rio Tinto Limited ( Rio Tinto ) and comprises the slides for a presentation concerning Rio Tinto. By reviewing/attending this presentation you agree to be bound by the following conditions. Forward Looking Statements This presentation includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this presentation, including, without limitation, those regarding Rio Tinto s financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to Rio Tinto s products, production forecasts and reserve and resource positions), are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Rio Tinto, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding Rio Tinto s present and future business strategies and the environment in which Rio Tinto will operate in the future. Among the important factors that could cause Rio Tinto s actual results, performance or achievements to differ materially from those in the forward-looking statements include, among others, levels of production during any period, levels of demand and market prices, the ability to produce and transport products profitably, the impact of foreign currency exchange rates on market prices and operating costs, operational problems, political uncertainty and economic conditions in relevant areas of the world, the actions of competitors, activities by governmental authorities such as changes in taxation or regulation and such other risk factors identified in Rio Tinto's most recent Annual Report on Form 20-F filed with the United States Securities and Exchange Commission (the "SEC") or Form 6- Ks furnished to the SEC. Forward-looking statements should, therefore, be construed in light of such risk factors and undue reliance should not be placed on forward-looking statements. These forward-looking statements speak only as of the date of this presentation. Rio Tinto expressly disclaims any obligation or undertaking (except as required by applicable law, the City Code on Takeovers and Mergers (the Takeover Code ), the UK Listing Rules, the Disclosure and Transparency Rules of the Financial Services Authority and the Listing Rules of the Australian Securities Exchange) to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in Rio Tinto s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Nothing in this presentation should be interpreted to mean that future earnings per share of Rio Tinto plc or Rio Tinto Limited will necessarily match or exceed its historical published earnings per share. Subject to the requirements of the Takeover Code, none of Rio Tinto, any of its officers or any person named in this presentation with their consent or any person involved in the preparation of this presentation makes any representation or warranty (either express or implied) or gives any assurance that the implied values, anticipated results, performance or achievements expressed or implied in forward-looking statements contained in this presentation will be achieved. Rio Tinto Commodity Markets - April 2008 2
Economic forces in commodity markets In 2008 resource markets are set for a fifth straight year of cyclical strength. Even as negative sentiment in relation to the US economy and credit markets has continued to increase during 2008, the market s perceptions about the fundamentals in most resource markets do not appear to have been much affected. Virtually all minerals and metals prices remain significantly above historical trend and many prices have now increased well above start-of-year levels. A US recession is not expected to have significant effects on commodity demand Looking forward, it is entirely possible that some commodity prices have yet to reach their cyclical peaks. Ongoing strength in demand and persistent supply constraints suggest that it will most likely take longer for commodity prices to return to long-run levels than would have been the case if historical reversion rates had applied. Also expected shifts in industry cost structures mean that long-run prices and in some instances margins are expected to be significantly higher than would be implied by historical trends. Rio Tinto Commodity Markets - April 2008 3
Aluminium, Copper and Iron Ore prices 400 350 Copper (LME spot) Aluminium (LME spot) Iron Ore (CVRD benchmark) Crude Oil (WTI spot) 400 350 300 300 Index (Jan 2004 = 100) 250 200 150 250 200 150 100 50 0 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 100 50 0 Source: Reuters EcoWin (Copper and Aluminium, March monthly average to 25 March). EIA (Crude oil). Steel Business Bulletin (Iron ore plus 65% increase in April 08) Rio Tinto Commodity Markets - April 2008 4
Strong demand arising from economic and demographic development will generate ongoing commodity demand growth Consumption of metals increases in line with increasing income 2007 population distribution 30% World average income per capita 2007 2022 Expenditure per capita US$ (2007 terms) 60 25% 20% India China Strong expected rise in consumption 2007-2022 50 40 Aluminium 15% 30 Copper 10% 20 Iron ore 5% US 10 Hard coking coal Nickel 0% 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 GDP per capita (in 2000 US$) Source: Global Insight for population distribution; Rio Tinto estimates for commodity expenditure profiles. Note: Expenditure profiles are based on Rio Tinto estimates of global income and consumption relationships and average real terms prices between 1990-2006. Iron ore and hard coking coal expenditure calculated based on crude steel demand projections, assuming all met by blast furnace production at historic average export prices. Rio Tinto Commodity Markets - April 2008 5
China is the new force in commodity demand Share of global consumption 60% 40% + Chinese share increasing 20% 0% Aluminium Copper Iron ore 2 Oil 3 20% 40% - US share declining ` 2001 2002 2003 2004 2005 2006 2007E¹ 2011E Source: AME for aluminium, copper and iron ore. 2001-2006 oil data source is BP Statistical Review of World Energy 2007 Note: Consumption data for aluminium, copper and iron ore represents "apparent" consumption rather than actual consumption and is determined by: apparent consumption = domestic production + imports - exports - change in stocks (where available) ¹ Forecast available only 2 Seaborne ³ Data for 2007 and 2011 is calculated by applying expected consumption growth rates from IEA (International Energy Outlook) to historical data Rio Tinto Commodity Markets - April 2008 6
Indicators of World Economic Activity 12 10 2008 Real GDP Growth * 2009 Real GDP Growth * 8 6 4 2 0 China India Russia** Indonesia Malaysia Thailand Rep of Korea Brazil Taiwan Australia UK Germany France Canada USA Japan % Source: *Consensus Forecasts (March 10 2008), **Global Insights forecast. Rio Tinto Commodity Markets - April 2008 7
Chinese copper tube is most exposed to exports but even in that case the domestic market dominates and US influence is relatively small Exports to the US, accounted for only about 5% of total Chinese copper tube production in 2007 Source: CRU, GTI Much of the copper tube consumed domestically is used in manufacturing air conditioners But the dominant market for Chinese air conditioners remains domestic with only 15% of output sold into the US market Chinese Airconditioner Production (2005 to 2007) Millions of units 28.1 US Export 113.6 Other Export 49.5 Domestic Source: China Household Electrical Appliances Association Rio Tinto Commodity Markets - April 2008 8
US$ Trade-weighted index of exchange rates (monthly) 100 95 90 85 80 75 70 0 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Trade-weighted index of exchange (Jan 1990 = 100) Source: IFS / Daily database Rio Tinto Commodity Markets - April 2008 9
Indicative lead time for key equipment Aluminium Smelting Australia & Africa Refractories, Anode Baking Furnace Rail Turnouts Power Transform ers Substation & Electricial Equ ipm ent Cru sh ers Mine St a cker s & Recl a im er s Carbon (Past e Plant ) Locomotives Potshells & Superstructure Port Stackers, Ship Loaders & Reclaim ers Grinding Mills 0 10 20 30 40 50 Months Normal Lead Time Source: Rio Tinto Procurement estimates. Rio Tinto Outlook for Metals and Minerals. Lead times mid-point estimates. 0 10 20 30 40 50 Months Forecast Lead Time Rio Tinto Commodity Markets - April 2008 10
Copper case study Rio Tinto Commodity Markets - April 2008 11
Copper exchange stocks 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 Source: EcoWin. Month-end stocks Rio Tinto Commodity Markets - April 2008 12 t
Copper mines output disruptions 8 built in disruption allowance gain/loss from adjusted forecast 6.6 % different from outcome, on year ahead 6 4 2 0-2 -4 1.9 net forecast error -0.2-2.0-1.8 1.0 2.5 1.1 5.8 5.8-6 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Brook Hunt; company reports; press searches Rio Tinto Commodity Markets - April 2008 13
World copper apparent consumption (% change yoy) 15% 10% 5% 0% 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 t -5% -10% -15% Rio Tinto Commodity Markets - April 2008 14
World copper apparent consumption: the long march up (smoothed % change yoy) 4.0% 3.5% 3.0% Maturation of developed country markets t 2.5% 2.0% Developing countries now beginning to dominate markets 1.5% 1.0% 0.5% 0.0% 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Steady emergence of developing countries and improved macro management Rio Tinto Commodity Markets - April 2008 15
The supply environment is challenging due to a number of factors 1 2 Capital is expected to become more expensive for new developments as are operating costs Capital costs for mine developments ($/t Cu) Position of the new projects along the cash cost curve 4,874 4,330 6,187 +11% 8,369 7,310 9,354 9,219 (% capacity in each quartile) 20 31 43 6 2007 2008 2009 2010 2011 2012 2013 Q1 Q2 Q3 Q4 3 4 The average grade of mill throughput is decreasing The role of technology is increasing especially block caving & automation for underground Average grade of mill throughput for all mines (percent Cu) -1% 0.59 0.59 0.58 0.58 0.57 0.58 0.56 Copper production by source % 26% 27% 51% 50% Production CAGR,'07-25* Under-ground 9.6% 74% 73% 49% 50% Open-pit 3.5% 2007 2008 2009 2010 2011 2012 2013 2007 2013 2019 2025 *CAGR is for production from each source Source:Brook Hunt; Rio Tinto Copper Business Development; Rio Tinto Technology & Innovation Rio Tinto Commodity Markets - April 2008 16
Aluminium case study Rio Tinto Commodity Markets - April 2008 17
Aluminium consumption is growing driven largely by China Primary aluminium consumption (thousand tonnes) 70,000 60,000 7.0% 50,000 3.1% 40,000 30,000 20,000 8.9% 14.7% 10,000 0 World China 1 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 1China s expected compound annual growth rate from 2007-2015: 11.1% Source: WBMS; CRU, Aluminium Quarterly Industry & Market Outlook, January 2008; Rio Tinto Alcan Rio Tinto Commodity Markets - April 2008 18
Location of 4 th cost quartile smelters shifted to China setting a new higher base for long run prices 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% % of production in fourth quartile of the global aluminium cost curve 0% 2001 2003 2005 China USA Europe Other Source: CRU Rio Tinto Commodity Markets - April 2008 19
Electricity price to Chinese smelters has been increasing reflecting energy constraints 45 Average power tariffs for Chinese smelters ($/MWh) 40 35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 Source: CRU Rio Tinto Commodity Markets - April 2008 20
China is now dependent on imported bauxite and alumina 12,000 H1 2007 ktonnes 8,000 4,000 57% of Chinese smelters alumina needs met by imports in H1 2007 0 Alumina content of bauxite imports Alumina imports Alumina need Source: CNIA, Chinese Custom statistics, Rio Tinto Rio Tinto Commodity Markets - April 2008 21
CNY/USD (monthly) 8.5 8 7.5 7 6.5 6 5.5 0 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Chinese Renminbi per US$ Source: IFS / Daily database Rio Tinto Commodity Markets - April 2008 22
Iron ore case study Rio Tinto Commodity Markets - April 2008 23
High spot prices are consistent with marginal costs USD/tonne CFR 200 180 2007 Cost Curve (CFR China @ October 2007 Spot Freight Rates) 160 140 120 100 2006 Cost Curve (CFR China) 80 60 40 20-0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1000 1050 1100 1150 1200 Mtpa Rio Tinto Commodity Markets - April 2008 24
Cost Inflation at the margin has been greatest in India Average Cost Per Tonne of Indian Exports 200 180 Indian Production 100 160 90 140 80 USD/tonne CFR 120 100 80 2007 Cost Curve Price ( Usc/m tu) 70 60 50 60 40 20 40 30 44.6-20 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 Mtpa 900 950 1000 1050 1100 1150 1200 Average cost per tonne of output in 2006 Increase in shipping costs Exchange Rate Appreciation Increase in Domestic transport Costs Tax Average cost per tonne of output in 2007 Rio Tinto Commodity Markets - April 2008 25
Costs are also rising in China as Ore availability declines Source: Mysteel Source: Mysteel 8 7 6 5 Grades of Domestic Iron Ore 45% 40% 4 3 2 1 35% 30% 0 4-0 n a J 4 l-0 u J 5-0 n a J 5 l-0 u J 6-0 n a J 6 l-0 u J 7-0 n a J 7 l-0 u J 25% Source: Mysteel Growth in domestic ore consumption YoY 6mma Implied Fe grade of ROM 6mma Source: Growell Rio Tinto Commodity Markets - April 2008 26
Four key Chinese development themes 1. Rapid growth 2. Commodity intensive growth 3. Decoupling/resilience 4. Increasing domestic resource production costs Supporting a case for strong global commodity demand and prices Rio Tinto Commodity Markets - April 2008 27