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 exert that power. Though this would not be any real comfort for Twiggy as all it would mean is that at a national level Australia should control the amount of iron ore being exported into the international market.   In such a scenario the lowest cost producers would still prevail but the margin they would make would be larger.

But of course this is all moot if in fact Australia does not have pricing power in the iron ore market. The confusing thing is that the “surviving majors cartel oligopoly” argument involves the assumption that once we get rid of all the juniors (which the argument says is a good thing because Australia has currently no pricing power and keeping them alive is a waste of time and money) the oligopoly survivors will suddenly have pricing power.

What is much more likely is that those oligopoly survivors will continue to fight for market share right to the bottom even after the juniors have gone and on the way down they will continue to whinge about the cost of wages in Australia, the level of taxation and the rate of royalties.  The usual stuff miners whine about as they extract our mineral resources.

On the assumption that Australia does have pricing power the most sensible option in the national interest is to manage the volumes available for export by use of transferable auctioned export volume permits and nice fat royalties.

A system of auctioning transferable export volume licences would be quite simple.  Each licence would be for a million tonnes per annum (or some other quantity or period) and the total number of licences would match the amount of iron ore that Australia wished to supply the world market in the relevant period.  The buyers of the licences can trade them and they would end up with whoever valued them most highly. In principal this should be the lowest cost producers.

That will limit supply at a national level and ensure the volumes exported are by the lowest cost most profitable producers (as they will bid more for the export licenses).

States would remain free to set royalties at the highest rate that they think the market will bear.

A regime such as this would not help Twiggy though as BHP and RIO would be able to out bid FMG for all the export volume licences as they are the lowest cost producers.

Yes – if Australia actually has no pricing power such a regime will not work and we (the states that is) will just need to rely on extracting the highest level of royalties that the market will bear (the point at which we take their threats to go elsewhere seriously) but if we really have no pricing power than a oligopoly cartel by the majors is not going to give us any real advantage either beyond a relatively small workforce in Hi-Vis vests.

Finally – I am in two minds whether it is “moral” for Australia to seek to manage the market using control over the volume of its resources it supplies the international as there are real benefits to allowing Chinese consumers and others access to cheap materials for housing and manufactured goods. But thinking like that is hardly what any of our currency war trade rivals are thinking about so why should Australia?

China has been playing all sorts of games with its rare earth minerals on the basis that having a large supply gives them market power, the USA is encouraging energy resources towards the domestic market, so why shouldn’t Australia play the same game with its very low cost iron ore resources.

5 thoughts on “Twiggy, FMG and the quaint notion of the National Interest

  1. Two words:
    China
    Vale

    One customer and a competitor closing in…

    BTW way flawse if you’re listening, discovered this morning my espresso has gone up to $4!! Im only making my own coffee from now

    Liked by 1 person

    • That second word ‘Vale’ suggests there may be some excellent synergies arising from a cosy chat between Mr Robb and his Brazilian counterpart.

      Australia and Brazil as the OPEC of iron ore should be able to agree to national maximum export volumes.

      Again this depends on what one is prepared to do in the National Interest.

      Like

  2. Yes – Wylie said much the same thing so I will recycle my response!

    “….Everyone makes out the Chinese need us , they dont, we are just convenient, like 7-11…..”

    That is the question I am asking with regard to iron ore – though of course convenience has a price and as we know 7-11 charge through the nose for being convenient.

    If Australia has no market power with regard to iron ore (which is what you seem to saying) the answer is clear, we cannot hope to succeed in controlling the market with supply and therefore must make do with setting royalties at the highest possible point before the miners decide it is more profitable to head overseas. And that level of royalties might be quite low.

    I don’t know the answer to the question of whether Australia has pricing power – Twiggy reckons we do but a lot people seem to think we don’t. I am merely pointing out that if Australia has no pricing power than a surviving majors cartel is unlikely to be of much benefit beyond a relatively small workforce in hi-vis vests.

    The damage has already been done. Plus wasting all that labour and capital in a mountain of pointless CAPEX that bent the rest of the economy out of shape and will make the politicians even more susceptible to the inevitable arguments from the surviving majors that they need wages and taxes cut to the bones or they will go off shore.

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      • Which of course is the reason any connection between what they say and the national interest will be purely coincidental. I wonder when that old silver tongue Mr Robb will get on the plane and head to Brazil to strike a deal.

        What could be more appropriate than an Organisation of Iron Ore Exporting Countries – IOEC (pronounced ioooooo-EC).

        The colours would be green and gold/yellow.

        Funny thing is that when I suggest Australia exert pricing power alone or with Brazil a lot of people start getting wobbly and worry “What will China think?”.

        Do they think OPEC gives a rats what China thinks? OPEC would love the sort of market power that Australia and Brazil would have.

        I suppose it is hard to expect much spine from a country that allowed itself to become a series of branch offices of off shore companies.

        Chances are the Brazilians would line up at the airport to welcome an offer from Australia to help bring ‘order’ to the market for a resource important to both countries.

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