World Economy

Rio Tinto Behind on Driverless Rail System

Rio Tinto Behind on Driverless Rail SystemRio Tinto Behind on Driverless Rail System

Creating the world’s largest moving robots to transport iron-ore across the vast Australian Outback is proving more complex and time-consuming than expected for Rio Tinto Group, fueling doubts the technology can deliver promised returns as major rivals defer similar investments.

Rio, which gets more profit from iron-ore than anything else, is already two years behind schedule with a $518 million effort to deploy automated trains on its 1,700-kilometers of track. While the system was designed to save money by expanding capacity and reducing labor costs, instead the delays mean the producer has cut output forecasts, and raised questions about whether the project is viable, according to Deutsche Bank AG, Bloomberg reported.

Big mining companies like Rio are no strangers to automation in Australia, the world’s biggest iron-ore exporter. Many use driverless systems for trucks and drills at mines and remotely operated equipment at export terminals. Winning savings on the trip between those two locations is proving more difficult, as the industry seeks methods to extend cost cuts as iron-ore prices have tumbled 74% from a record in 2011.

London-based Rio said in 2012 that its automated-train project would be finished by 2014, ushering in 2.3-kilometer-long convoys that would essentially be the world’s largest moving robots, overseen by an operating center about a 90-minute flight away in Perth. The producer forecast in September that the work would be finished by mid-2016, and says it will give Rio a decade of competitive advantage over rivals who didn’t have the technology.

“It’s been disappointing that it’s taken as long as it has,” said Andy Forster, a senior investment officer with Argo Investments Ltd., which manages about A$5 billion ($3.6 billion) in Australia and holds Rio and BHP shares. “There is a risk, as has been seen, associated with going down this path.”

Last year, Rio’s cash cost for iron-ore fell 24% to $14.90 a metric ton. Producers are winning savings mainly because of a stronger dollar and cheaper freight rates, according to Citigroup Inc. Rail costs typically account for about $2 a ton, meaning Rio is targeting “quite small incremental gains,” said Clarke Wilkins, a Citigroup analyst in Sydney. “The big and easy cost savings have been done,” he said.

Even with delays, the introduction of rail automation can help producers to further reduce costs, according to Randal Jenneke, head of Australian equities at T. Rowe Price Group Inc.