An iron ore National Export Volume Auction (NEVA) is the best way to protect national income

Over the last few weeks the airwaves have been buzzing about the falling national income (and the problems for Mr Hockey’s budget) due to the rapid decline in the price of iron ore and Twiggy Forrest’s calls for restraint from BHP and RIO when it comes to delivering larger volumes of Australian iron ore into slowing international markets.

Unfortunately, the debate has lacked imagination and has tended to focus on two points,

  • whether Mr Forester or any of the junior miners are “good blokes” or “good sheilas” and deserve ‘help’ or
  • whether it is possible for any single Australian mining company /contractor to exert market power.

The later proposition has had all the ‘free market’ buffs out in force proclaiming that the market should be left to ‘sort out the problem’ as though the world is full of markets that are free and unmanipulated and thus the iron ore market should be left to run free………… like a Snowy Mountains brumby.

In all this static and distraction a fundamental point is being missed and that point is that at the present time and for some considerable period it is highly likely that AUSTRALIA will retain massive market power in the international iron ore market.

The bold capitalisation of Australia above is important because to date everyone is focused on the market power of individual mining companies/contractors rather than Australia who actually owns the iron ore.

While the Glass Pyramid has described in a number of recent posts, elements of the argument in support of and the solution to the iron ore ‘question’ from the perspective of the Australian national interest, there is some benefit in presenting the arguments and the solution again in a single post. Continue reading

Iron Ore Watch: Guess who wants to buy Twiggy?

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available).

News reports in the AFR and commentary at Macrobusiness suggest that Chinese interests have made FIRB applications to buy up some chunks of our iron ore industry in the form of FMG now that it is struggling for breath as our mining industry competes against itself on the world market.

If these reports are true they cast an interesting light on the media campaign by Twiggy in recent weeks and confirm that we need an open inquiry into Iron Ore but not because Twiggy wanted it – perhaps despite the fact that Twiggy was asking for it.

Some have suggested that Australia is being played and they are right but the truth is our leaders put on the tutu and started skipping around the stage before the orchestra sounded a note.

We are most certainly being played and have been ever since we got this crazy idea that one of our major resources could be managed by reference to ‘free market’ principles instead of the national interest.

It doesn’t really matter which mining companies we employ to dig up our dirt they are just contractors.

It doesn’t matter if they come from London, America, South Africa or even China.

What matters is how much they are allowed to dig up and export and how they pay for the right to do so.

And when you think about it in those terms the answer is straightforward. National export volume caps with the miners bidding for volumes within those caps.

As that Brazilian article I linked to last week made clear, China manages what resources it will allow into the international market all the time.

Australia has a simple choice be ‘free market’ fanatics and sell at OUR marginal cost of production or be a smart manager of its national resources and ensure that we never compete against ourselves on the world market.

Now more than ever we need a Proper Inquiry into the Iron Ore industry.

TPP/FTA Watch: Mr Andrew Robb’s massive tariff on Australian Industry and Workers

Mr Robb’s greatest folly in his TPP/FTA adventurism is the massive green light he has given all of Australia’s trade rivals to impose high tariffs on Australian industry and workers.

While he fumbles around trying to get the USA, Japanese, Chinese, Koreans and anyone else who crosses his path to let Australia sell them a few tonnes more cheese or steaks sometime next decade, he is happily giving all of them the power to impose massive new and ongoing tariffs on all of Australian Industry and every local worker.

Yes – you heard the Glass Pyramid correctly.

Mr Robb is making life even easier for our trade rivals by allowing them to place massive tariffs on Australian industry and every Australian worker.

How does it work?

Simple, if you are a trade rival of Australia (like most of our developed world allies are) and you want to give your domestic industry an advantage over Australian industry by manipulating exchange rates all you need to do is export capital to Australia.

Exporting capital means buying up lots and lots of Australian Government Bonds, IOU’s issued by Australian banks for mortgages and buying as many Australian assets as you can fit in your briefcase.

When you are allowed to do it – your exchange rates goes down and Australia’s exchange rate goes up.

Then what happens is that your exports to Australia rise and Australian exporting industries and import competing industries lose sales and eventually shut down.

If you think that sounds a bit rough – you are right, but what is worse is that as it happens you have prime fools like Continue reading

Bank Watch: QE for Debtors is coming !

GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT

Ever since the Queen of Australia found that there was competition for the abbreviation QE there has a been growing parade of phrases with “QE” bolted on.

  • QE 1, QE 2 and QE 3
  • QE for Wall Street
  • QE for Main Street
  • QE for the People
  • Bankers 4 QE 4-evah!
  • QE for the Asset Rich.
  • etc

Never one to miss a merchandising opportunity, and with a large stock of slogan ready T-Shirts gathering dust, the Glass Pyramid is pleased to announce the imminent arrival of QE for Debtors into the meme market place.

What is QE for Debtors?

QE for Debtors is essentially a bank approved form of QE for the People which itself is being promoted as the inevitable replacement for the original versions of QE which amounted to QE for the Bankers/Wall Street/Asset Rich etc.

To understand why QE for Debtors is on the way, a quick tap dance along the QE evolutionary yellow brick road is necessary. Continue reading

Iron Ore Watch: Have an Inquiry but make it a proper one.

To read the original version of this comment in the original context at Macrobusiness.com.au – (which – IMHO – has been the Number 1 place for discussion and analysis of the Australian Iron Ore industry for half a decade) click this link. (link maybe locked – but there is a free trial available)

Okay, so what is the truth of the situation with regard to iron ore supply and Australia’s market power in the world market?

This article  in Reuters paints a tale of woe for the West African producer countries who cannot make mines break even at $60 per tonne – what price do they need to justify the capex to get the mines operating? The article seems to be suggesting that some of these mines will not get out of bed for less than $100.

This is important because much of the mockery of Twiggy this week has assumed that Australia has no effective market power and therefore any attempt to limit Australian production at a national level to hold prices at a higher level will not work as other low cost producers will rush in.

But will they, if their cost structures are such that the price would need to rise to well north of $60 to get them interested? What are the cost structures of other potential serious producers. If only Vale can get close to Australia’s production costs and volumes, that would suggest that apart from Vale, real competition for Australia may be increasingly limited as prices get lower and lower under $100.

Most West African projects require a long-term price well above $100 per metric ton (1.1023 tons) to achieve an acceptable return, he said. BHP and Rio have average iron ore costs of around $20 a metric ton in Western Australia and are cutting that further.

Why wouldn’t it be in Australia’s interest to manage the supply of its lowest cost of production ores into the international market to ensure prices remain at the point where other producers are not prepared to take the risk of entering production.

Why supply the international market at $60 when we have burnt off large chunks of the competition at $70, $80, $90 or even $100

Continue reading

RBA Watch: Operation “Pea Shooter” – struggling to hit target.

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available)

Wednesday morning after a refreshing sleep following Mr Hockey’s 2nd Budget speech, the Australian dollar celebrated by leaping over the US80c barrier briefly.

Update:   The battler has now bounded over $0.81  (H/T @mektronik 14 May 2015)

For all of those who believe that the RBA is setting interest rates to manipulate the Oz currency against the manipulations of our allies and trading partners, what has become fondly regarded by the TGP as “Operation Pea Shooter” is proving a bit of a wet cracker on the Queen’s birthday long weekend.

That the mostly mythical (mythical because it is really about the Debt Machine) RBA ZIRP currency strategy “Operation Pea Shooter” is not proving to be a rip roaring success at resisting the predatory capital that is being unleashed by the ZIRP policies of foreign central banks is not news to the Glass Pyramid.

Managing exchange rates (without de-floating the dollar) is best done with no half measures

It is time to plug the worst holes in our capital inflow dykes.    Continue reading

Iron Ore : Stirring the pot – Collected TGP transmissions.

GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT

With Twiggy continuing his crusade against the big boys of Oz Iron Ore and attracting more participants to the debate day by day (the AWU joined in today), the Glass Pyramid research unit – that prefers to while away its days examining advanced market co-ordination methodologies – has been emitting a range of ‘shards’ on the topic in recent times in various forums. They are presented below for your enjoyment and possible amusement.

The Australian Iron Ore “question” seems to boil down to three alternatives depending on whether you think Australia has pricing power in the international Iron Ore market.

1.     Australia has pricing powers in the Iron Ore Market If this is the case then the most sensible approach is to adopt a national system of export volume licences so that the total volume of Australian Iron Ore entering the international market is managed.   For reasons explained below and previously on TGP this is not likely to help Twiggy but it will help Australia get the best return from the extraction and export of its mineral reserves.

2.     Australia alone does not have pricing power but it does if it works with Brazil (and Guinea and others in due course) Formation of an OIOEC (Organisation of Iron Ore Exporting Countries or “Oi”-OEC) would allow the total volumes of Iron Ore released into the international market to be managed. But with Mr Robb in a state of teenage infatuation with signing Free Trade Agreements and stitching Australia into the TPP the idea of trying to ‘manage’ a market – like most of our trade rivals do – is probably alien to him (and all the other free trade purists dominating Australian public debate).

3.    Australia alone does not have pricing power and ‘managing’ the Iron Ore market with other producers is not an option. In this situation, which many think is the reality on the basis that there is lots of iron ore lying in clumps around the planet, the only option is for Australia to extract as much return as possible from our “dirt” as the competitive international market allows and the simplest and constitutionally safest way of doing this is by increasing state royalties until the pips squeak- especially before any more excess supply enters the market.   This is superior to the theoretically splendid super profits tax (RSPT) or MRRT approach which suffers from over cleverness and being easily painted as an ALP Canberra/centrist power/tax grab.

This means that the ALP must let go of its dreams of a Canberra administered RSPT or MRRT and instead support state governments increasing royalties as high as possible. Colin Barnett will surely appreciate having the support of Bill Shorten, the mining unions and the other premiers who have been giving him a hard time of late for ‘blowing the boom’ – in fact he may need a bit of Dutch Courage as Colin seems particularly concerned about falling off a few mining company Christmas Card mailing lists. The assorted “shards” on the above appear below – with links to their original contexts on www.macrobusiness.com.au Continue reading

Green Watch: A new leader? – An opportunity for a new Green economic agenda.

GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT

In the main quadrangle of the Glass Pyramid lies a fountain fed by an underground spring. As the waters seem likely to run forever it was decided by the ground keepers to call the fountain ‘Hope’.

That ground keeper “dad joke” comes to mind when considering the approach to economics by the ‘progressive’ Green Party. Surely a party that claims to be progressive will one day adopt an approach to economics that is truly progressive and not just a grab bag collection of ‘tie-dyed’ and ‘found’ policies that invariably catch smirks inside the metropolitan city limits (outside of inner-urban villages that is).

With Richard di Natale’s ascension into … the Green leadership suite there is a wonderful opportunity for the Greens to adopt an economic narrative and agenda that is not only truly progressive but will make it much more likely that their more organic “Nimbin Ready” policies will catch on outside the warp and weft collectives.

As an eager supplier of free unsolicited advice the Glass Pyramid “Gardening Club” offers the following program to the Greens.

Progressive political parties and other social justice organisations must understand that unproductive international capital flows are at the core of most of the problems they are seeking to address.

It does not matter what your ‘progressive’ social agenda entails you will get NOWHERE unless you understand how ‘unproductive’ international capital flows are the fundamental driver of most of the problems you are seeking to overcome.

Yes, mere mention of the words ‘unproductive capital flows’ is enough to make most eyes glaze over instantly but it is actually a very simple issue and after a few paragraphs the penny should start to drop.

“….Over the last few decades, our economic system evolved into the ultimate exploitation machine: Rich people in the West exploit ordinary people in the West who with their consumerist lifestyle exploit poor people in Asia/Africa and we all together exploit natural resources on this planet to the brink of existence…”     doctorX

doctorX nails the problem but what is the primary mechanism that has produced this outcome (and most importantly what is the method by which the average and generally well meaning voter in Oz, USA and other Western Countries etc agrees to a process that is undermining their future economic prosperity but also the sustained prosperity of developing countries).

It is simple – Continue reading

Twiggy, FMG and the quaint notion of the National Interest

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available)

It is unfortunate that Twiggy is claiming to speak in the national interest because that is hardly believable.  His shareholders and bond holders did not sign up for that gig!

What is unclear is whether Twiggy’s claim that Australia has pricing power in the iron ore market is credible.

If Australia has real pricing power then it may be in the national interest to Continue reading

RBA Watch: The joke that is RBA “independence”

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available)

The RBA May interest rate meeting “game” has kicked off yet again – who has got the inside whisper! Who has been dancing with the trainer’s niece at a CWA knees up in Walgett?

Is it the long toothed sage or the new kid on the block or are they all just lucky guesses.   The NKOTB has been given short odds and certainly sounds certain so the Glass Pyramid will go with that – the RBA will cut folks!.   As discussed here and here– the path to ZIRP under the current economic model is simply a question of when not if.

It is embarrassing enough that the RBA have lost control of the economy and are now watching it rotate faster and faster as it disappears down the ZIRP / household debt / foreign debt plug hole as the “currency warfare” by our trading rivals/allies gets out of control.

We can put that down to the ideological obsessions of the economic model they have been made responsible for implementing by the pollies.

The bit that is outrageous is the lack of clear and unambiguous warnings of what is happening and any explanation of the alternatives to the current model that should at least be discussed.

There is nothing about the RBA charter or their role as public servants, especially ‘independent’ public servants, that prevents them from Continue reading