Are iron ore prices intentionally being driven down? Oi Oi say Aussie bosses
The Australian government has decided not to go ahead with an inquiry into claims that the world's biggest iron ore miners are intentionally driving down prices to push their rivals out of the game. What is the debate surrounding iron ore price tactics, and should something be done, or are these strategies just a standard part of the process of industry consolidation in the face of a depressed market?
A lot can change in four years. Back in 2011, Andrew Forrest was riding high on an iron ore price of $130 per ton and a favourable exchange rate between the Australian and American dollar. As founder and chairman of the exclusively iron ore focussed miner Fortescue Metals Group, his fortune had gone up and up to make him Australia's second richest person, behind fellow mining magnate Gina Rhinehart, with an estimated fortune of $6.9 billion and a reputation as a respected leader.
Fast forward to the present day and things are far less rosy. Thanks in large part to the slowdown of China slumping demand for steel, the price of iron ore on the market is down at $51.28, while shares in Fortescue have slid from a 2008 peak of $12.38 to just $1.64 in July. For Forrest, whose wealth is almost exclusively tied to the company, talk is even turning to whether his one billion shares will take him out of the 3-comma club and into the realm of mere multi-millionaire. But Forrest, who is still known to many by his schoolboy nickname of 'Twiggy', will not leave without a fight.
His contention is that while China and other slowing growers have brought about a reduction in demand, it is other miners that have brought the bottom out of the market by refusing to slow production to balance the equation. While he has criticised Brazilian firm Vale for continuing to ramp up production, the vast majority of his anger and accusation is reserved for BHP Billiton and Rio Tinto.
Fortescue accuses majors of OPEC like influence
Leveraging the fact that both firms have a heavy footprint in Australia, both in terms of assets and offices, he accused the two of OPEC like activities to control the price: "Australia is the biggest producer. These two companies control more iron ore than OPEC ever did in oil."
His argument, which has been met with equal measures of agreement and disagreement, is that having invested heavily in cost cutting technology and workforce measures, the mining majors are seeking to use the low-price environment to drive out the competition. "They've been hairy-chested and saying we're going to trash the iron ore price through over supply and oversupplying for years and years or I want to be the last man standing, well that's fine but that's hurting Australia badly," he said.
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Having recently been forced to make the 'heartbreaking' decision to cut 700 from his 4,500 strong workforce, not to mention having more than $6 billion wiped from his personal wealth, it is clear that Forrest includes himself among those hurting badly. To try and resolve the issue and ease such hurt, he made the call for the industry to cap production to enable the price to increase.
"All of us should cap our production now and we'll find the iron ore price will go straight back up to $70, $80, $90," he said. Returning to his theme of patriotism and the damage the decline in price was doing to Australia he added that the "tax revenues that will generate will build more schools, more hospitals, more roads, more of everything which Australia needs."
Forrest outburst risks falling foul of regulators
While designed to ignite a debate around the activities of the two majors, it was Forrest himself who was the first to be put under the microscope when the Australian Competition and Consumer Commission announced that it was investigating whether the comments constituted anti-competitive behaviour.
"Attempting to cap pricing, or fix pricing, even making the attempt, is illegal," said Rod Sims, chairman of the ACCC. "The law says that not only can't you do things that are a breach of the competition provisions of the Act, but you can't attempt to do them."
As it turned out, the comments were indeed allowable courtesy of an exception granted to goods that are exported from Australia and soon after his case began to gather support. Careful not to lean too heavily on either side, Australian Prime Minister Tony Abbott stated that it was important to "get to the facts".
"There are all sorts of claim claims floating around, the important thing is that we have a dynamic, productive, creative iron ore industry for the future," he added. With attention appearing to ratchet up on whether or not Forrest had a point, the time came for the accused to join the debate.
Rio Tinto and BHP Billiton enter the debate
Responding to Abbot's tacit endorsement of further exploring the issue, BHP Billiton chief executive Andrew MacKenzie was quick to highlight the risk of a protectionist move backfiring on the Australian economy and boosting its competitors. "It would be an amazing gift to our major competitor Brazil." Explaining that a Chinese delegation was currently on its way to meet with the Brazilian government to discuss trade opportunities, he said: "The alliance that is in place for the supply of iron ore would shift primarily away from Australia towards Brazil."
Throwing in his assessment, CEO of Rio Tinto Sam Walsh, dismissed the calls as sour grapes from those who had failed to prepare for the downturn. "The industry's cycles have caught some unprepared and others looking for answers. There also seems to be a view that you can talk markets into submission or bend reality to suit your will."
Addressing the unstable environment, he cautioned against making rash moves. "In times of economic uncertainty, it might sound seductive or comforting to want to put up the barriers but we must keep markets and trade open," he said.
A decision either way won't be easy but it must be made
Following the interjections of the major's, talk of investigations and reviews died down and a short period of calm set in. Then, in an unexpected twist of fate, an opportunity for resolution presented itself when Rio Tinto announced that its iron ore production would be 10 million tons lower than forecast over weather-related disruptions. Greeted at first as an opportunity to bring balance to the market, the development has now reignited the dispute with the leaking of an internal memo from Walsh stating that despite the setback, they would "maintain this momentum" to ensure success "no matter what the external environment".
With any hope of a calm conclusion now dashed, it appears almost certain that the debate over whether or not measures should be taken to protect Australia's iron ore industry should be considered. On the one hand, Forrest, though clearly drawing from a strong personal motivation to revive his riches, has reasonable grounds to suggest such measures.
His company may well be the largest solely iron ore focused mining outfit in Australia, but it is far from the only one. Many have fallen by the wayside already and many more are at risk if the prices remain subdued, so the possibility of Rio and BHP driving out the competition, intentionally or otherwise, is open.
Equally, the defence put forward by both Walsh and Mackenzie that protectionist policy is both against the free market principles that have built the Australian market to what it is and a boon to its Brazilian competitors carries water. With no sign of a natural resolution in sight, the Australian government and its regulators are the only ones that can dampen things down. There is no easy decision, but no decision at all would be the worst, allowing the industry to focus too much on mud-slinging and when it should be centered on mining.