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BUSINESS ENVIRONMENTS,ENVIRONMENT, MARKETS AND REGULATIONSREGULATION

Competitive environment
Rio Tinto is a major producer in all the metals and minerals markets in which it operates. It is generally among the top five global producers by volume. It has market shares for different commodities ranging from five per cent to 40 per cent. The competitive arena is spread across the globe.
     Most of Rio Tinto’s competitors are private sector companies which are publicly quoted. Several are, like Rio Tinto, diversified in terms of commodity exposure, but others are focused on particular commodity segments. Metal and mineral markets are highly competitive, with few barriers to entry. They can be subject to price declines in real terms reflecting large productivity gains, increasing technical sophistication, better management and advances in information technology.
     High quality, and long life mineral resources, the basis of good financial returns, are relatively scarce. Rio Tinto’s ownership of or interest in some of the world’s largest deposits enables it to contribute to long term market growth. World production volumes are likely to grow at least in line with global economic activity. The emergence of China and eventually India as major economies requiring metals and minerals for development could mean even higher market growth.

Economic overview

The world economy grew by 4.95.2 per cent in 20062007 on a purchasing power parity basis. This wasbasis, marking the fourthfifth successive year of global growth in excess of four per cent.
     Growth was broad based, but once againThis extended global economic boom has inevitably not been without its stresses and strains. The implications of some of the excesses driven by previous loose monetary conditions and easy credit availability emerged last year. The full implications of the US housing downturn which started in the second half of 2005 began to be felt last year and China provided the bedrock for this expansion. Although thepace of US economic growth progressively slowed over the coursehas led to financial market volatility and asset writedowns by some of the year,major banking institutions. Despite this, the manufacturing sector of the US economy performed well during 2007 and growth across the country averaged 2.2 per cent.
Growth in the rest of the developed world was reasonably supportive for the mining sector. European Union economies, which in general are not subject to same imbalances as the housing market faltered, it still managed to rise by 3.3 per cent over its 2005 level. Chinese growthUS, grew above their long run trend rate for the second year was 10.5 per cent, its biggest annualincrease in over a decade.row. The Japanese economy, whilst volatile and still dependent for growth on external demand, expanded by 1.8 per cent.
     The developed world accounts for around half of global metals demand but its importance to commodity markets is much less than it was as recently as the start of this decade. Changes in demand in other regions – most notably in China, but also increasingly in other emerging countries – has become much more important to the mining sector than cyclical fluctuations in consumption in the developed world.
So whilst weaker economic growth in the US, Europe and Japan acted to hold down growth in commodity demand last year, the effect of this was more than offset by accelerating economic activity elsewhere. China has been the principal driver behind this change. Its economy expanded 11.4 per cent last year and apparent copper demand in the country rose 2.4by close to 30 per cent. Aluminium demand was up a remarkable 40 per cent. Other emerging markets also achieved buoyant growth. The Asia region excluding Japan expanded by eight per cent and in Asia as a whole growth was 5.1 per cent.Latin America grew by 4.8five per centcent.
Given that 2007 started with already depleted stocks, and activity picked upwith the mining industry still struggling to add capacity despite increased levels of capital investment, the macroeconomic conditions outlined above were more than sufficient to generate some further increases in Europe, rising by 2.7 per cent on 2005.
     Despite this sustained rapid globalwhat were already high prices at the start of the year. A number of historic price highs were breached. Slower growth and higher commodityadditions to supply caused some metals prices global inflation remained relativelytame. Central banks have increased interest rates as the balance of inflationary pressure has shifted towards the upside.Even the Japanese Central Bank raised interest rates for the first time since 2001, but this has been a progressive development and both financial and foreign exchange markets have been stable.
These strong underlying economic conditions, a general ongoing low level of commodity stock availability and continued delaysto fall back in bringing on new supply contributed to further large increases in commodity prices in the first half of 2006. In the second half of the year, but a number of bulk and energy commodities prices continued their upwards trajectory.
Amongst the base metals, lead, tin and nickel registered the greatest increase in annual average prices in 2007 (up 82 per cent, 59 per cent and 65 per cent year on year respectively). Aluminium and copper saw more modest increases of three per cent and six per cent, respectively. Zinc was the only LME metal to return a 2007 average price lower than in 2006, some general easing in prices was recorded as the pace of demand growth slowed and expectations of faster supply growth filtered through. There are however some important differences between trends inindividual commodities. With few exceptions prices remain well above their historical levels and significantly so inmany cases.
Strong growth in Chinese iron ore imports continued into 2006 and the already tight market conditions worsened following heavy rain early ina sharp sell off through the year. After a record price increase of 71.5 per cent during 2005 a further 19 per cent
was agreed in 2006. BenchmarkIron ore benchmark prices are set to rise a furtherincreased by 9.5 per cent in 2007.
The cash priceApril but with additions to low cost supply still not keeping pace with demand the market has become even more dependent on high cost Indian and Chinese production. As a result of copper reached a record high of almost US$4 per pound in May 2006, but finished the year on a weaker tonethis and over the year averaged US$3.06 per pound.
After lagging the other base metals in 2005 the aluminium price rose to an annual average of US$1.16 a pound in 2006, its highest in real terms for 17 years. Whilst the metal was strong,higher freight costs, spot alumina prices fell sharply later in the year as a surge in Chinese refinery production came on the market. After starting the year at US$650 a tonne, spot aluminaended not much above US$200.
The volatility seen in metals markets last year was replicated in the energy sector. Spot prices for seaborne thermal coal reached the low US$50s a tonne early in 2006, but were US$10 per tonne off their peak later in the year.The annual average price was similariron ore to that achieved in 2005. After more than doubling in the 2005/6 marketing year,coking coal prices fell slightly in 2006/7 in response to mixed demand in their major markets. Prices for Powder River Basin coal in the US started the year at very high levels and although they ended the year somewhat weaker the annualaverage price was up 25-30 per cent (depending on grade) over 2005 levels. Uranium prices rose sharply during 2006on concerns about low stocks. Spot pricesChina doubled over the course of the year. Benchmark prices are likely to see more of the benefit of these strong market conditions in 2008.
In February 2008, Rio Tinto noted the announced settlements between another iron ore producer and steelmakers, and indicated it would continue to negotiate for a freight premium to reflect Australia’s proximity to Asia and major customers.
Australian thermal coal export prices ended the year on a high note of US$90 per tonne due to tight market conditions resulting from diminishing Chinese exports and infrastructure constraints on supply. The average annual price of US$65 per tonne was one third up on the 2006 level. In contrast, average US coal prices in the Powder River Basin were down some 20 per cent on their 2006 level, reflecting softer demand in the US. The star performer amongst energy prices was uranium, with average reported spot prices doubling year on year. Most trade in uranium takes place on longer contracted terms, and these have begun to reflect stronger market conditions.
Demand for industrial minerals such as borates and titanium minerals continuedhas held up well with prices holding