Increasing demand stretches the supply chain

Along with strong demand for metals and minerals have come constraints and disruptions in the supply of the equipment, spares and construction materials that are the lifeblood of an operating mine.

Until now, the effectiveness of Rio Tinto's procurement process, the foundations for which were laid a decade ago, has shielded the Group's operations from the worst effects of current shortages and cost increases.

Today, however, with industry wide mine production expanding as fast as it can to meet increased demand, the competition for scarce resources in every sector of the industry is becoming more fierce. The boom has caused a market shortage of basic mining inputs such as tyres and explosives. There are shortages, too, of cement, ore cars and steel, and in addition longer lead times are required to get large mining equipment and spares.

Orders for new heavy mobile equipment have doubled since 2000, despite prices escalating rapidly. The market for off road tyres is extremely tight - and no capacity has been added to the industry for more than three years.

Yet Rio Tinto has maintained production in spite of tyre and other shortages. The Group is in a strong position for tyres and will have enough to meet forecast needs. This is due to good supplier relationships built up over the years and the Group's successful Improving performance together programme.

In 1998 the Group moved from purchasing by individual business units towards a combined approach that leveraged spending and volume to secure favourable terms for large Group contracts. In 2001 a new phase began with the deployment of electronic technologies. Today there is a fully integrated global procurement function that provides Rio Tinto with a competitive advantage at a time of rising prices.

Trade with China is becoming a two way street. China is not just a customer, it is also becoming a key supplier. Rio Tinto is sourcing an increasing volume of fabricated and manufactured products and raw materials from China, including rail cars and tugboats for Rio Tinto Iron Ore's ports and transport system.