Iron ore: opposition makes possible inquiry the Captain’s choice

Iron ore: opposition makes possible inquiry the Captain’s choice


Earlier this week iron ore was shaping up to be a political football, with the Coalition lining up with team Andrew Forrest and the opposition unclear on whether to play defence.

But Abbott is rapidly discovering that the economics of international trade in commodities like iron ore is not a game in which the voters will take sides.

And Labor’s Bill Shorten has quickly worked out that his party’s best shot is to torpedo Abbott for meddling in iron ore rather than get on board. This is despite the fact that over this week the iron ore price has renewed its downward trajectory.

Andrew Forrest wants a national debate.Andrew Forrest wants a national debate. Photo: Erin Jonasson

Labor has re-framed the debate this week and is calling even the whiff of a parliamentary inquiry on the subject yet another Prince Philip knighthood moment – a poor Captain’s choice.

Further muddying the public relations debate is talk out of Fortescue that it could also increase its own production through a joint venture with Chinese giant Baosteel. Its not exactly iron ore – rather a magnetite concentrate with 68 per cent iron ore content. Fortescue will argue this commodity is different. His detractors will disagree.

It is easy to see how any government that depends on the sale of a commodity for a large proportion of its tax-based revenue would be enticed by notions that a couple of big businesses like BHP Billiton and Rio are acting in their own interests ahead of Australia’s interest and should be brought into line.

But taking a shot at two of the country’s biggest and most powerful companies comes with risk. These companies are doing a fair job at mounting a case that any government wanting to interfere in this markets are either idiots or economic vandals.

So let’s just take stock of the facts.

There is a supply driven fall in the price of iron ore. And yes, BHP and Rio are in large part responsible for providing that excess supply. But Forrest’s Fortescue has also added tens of millions of tonnes to production over the past couple of years.

Forrest wants a national debate on the topic and the persuasive entrepreneur seemed to be making headway in getting the ear of Abbott and Hockey, if not other senior members of cabinet.

Forrest and his army of smaller miners are now losing support in Canberra in their quest to guilt the big producers into back-flipping on plans to continue to push fresh iron ore supplies into the market.

Remember 2010 when Forrest mounted a national campaign against the mining tax? His reasoning was that it was that it was a non-tax (devised by his large competitors) and wouldn’t raise any revenue.

He was right about that.

Forrest’s marketing genius is demonstrated in the fact that he achieved some of his objectives over the past few weeks. He has been behind the debate in Canberra about iron ore supply and pricing.

But it is not one he is likely to win – even though higher iron ore prices are both in the national interest and his own interest.

The fact is that even if the big producers are “signalling” that supply will increase and this is exciting the futures market into discounting iron ore, Fortescue and its supporters have only two areas of redress.

The first is to prove that BHP, and Rio are engaged in predatory pricing. This falls under the auspices of the Australian Competition and Consumer Commission which to date has come down clearly on the side of Rio, BHP and the economic rationalists that argue it’s about nothing more than the operation of supply and demand.

Forrest would only have a case if he could demonstrate that his large competitors are selling their commodity wares for less than the cost of production. Given BHP and Rio run operate in a number of commodities with a large historic cost base it would be difficult to pin-point the precise (per tonne) cost of getting their iron ore to market.

There are plenty of views from analysts on what that cost of production might be but none are suggesting BHP and Rio are operating at a loss.

Indeed there is a mounting chorus of economists, analysts and academics that are appalled at even the suggestion that politicians would interfere in the operation of a free international market.

Fortescue’s other option is to get further down the cost curve such that they can be confident of making at least some margin at the current price of below US$60.

Fortescue has been busy and relatively successful on that score.

But there is really one one group of constituents that get a say in BHP and Rio’s supply and pricing strategies: their shareholders.

The big boys of iron ore appear to be playing the long game – increasing supply in order to increase their market share and sacrificing short term profits to get an outcome.

To date the shareholders have been happy enough to go along for the ride, particularly as dividends have not been cut.