Glass Pyramid Exclusive

Iron Ore : Stirring the pot – Collected TGP transmissions.


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 6 May 2015

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.

11 May 2015

That’s right tonydd, Higher royalties during the boom was always the best and simplest way of securing the taypayers share of boom time prices.

Sadly, those greedy federalists in the ALP decided a complicated Canberra grab for cash was what they would do – instead of encouraging the states to adopt a higher royalty structure. That strategy allowed the mining industry a defensive strategy that was readily made partisan.

The stupid bit of course was that eventually the states raised royalties a bit anyway. If an Australian-Brazil co-operative to ‘manage’ the market is not possible, due to ideological blinkers in Canberra, then the only response is to get the states to fix royalties at the highest rate possible before miners threats to leave should be taken seriously.

Still none of this will be much comfort to Twiggy who without special treatment will struggle to survive. What is important is that the liquidation of juniors does not become an opportunity for our trade competitors to gain even more control over our national assets. Not holding my breath

12 May 2015

It sounds very appealing. On the assumption that Australia alone does not have pricing power and thus cannot manage the market by managing supply Trade Minister Twiggy with the new Leader, and reborn, Barnaby might take off on an urgent trade mission to Brazil to sign a non-aggression pact with Vale. Alan Jones could cut the oranges and provide breathless live crosses back to the local networks.

The deal between the two founding members of IOEC – Iron Ore Exporting Countries would be simple and involve agreed maximum annual volumes for various grades of ore. Each country would be free to divide up the annual volumes as they see fit. A clean auction of the volumes would make the most sense but no doubt some lurks may be permitted for junior birds with broken wings if said birds subscribe sufficient plates at the right party fundraisers.

Now of course the idea of Australia seeking and successfully negotiating an OPEC style market management deal with another major commodity producer like Brazil is absurd – it requires too much rat cunning and is not what our branch manager business and political leaders signed up for. So the next best solution is to forget about doing a deal with Brazil and instead gouge the miners with state royalties until their pips squeak and Gina starts threatening to dig up her daddies leases in Africa (did he have any? – really ?)

But we will not even do that because all the supporters of the dodgy ALP Federal miner tax grab spent so much emotional energy pooh pooing royalties (cause Colin gets the dough) as a sub-optimal economic solution that they will give the states little support if they play hard ball with the miners using that old fashioned ‘sub-optimal’ revenue raising tool. Anyone who is opposed to a ‘co-operative’ agreement with Brazil simply must support our state governments in gouging every cent they can from royalties.

To do otherwise would be un-Australian. If Colin Barnett is to be given a hard time it should be for being a wuss when it comes to ramping up royalties to the absolute limit. That is where the brinkmanship is required. Dig deep Colin – get together with South Australia and starting cranking up the royalties on Iron Ore. Better late than never.

14 May 2015

With few talking about an Oz-Brazil-Guinea (thanks WW for suggesting it needs to be a triple play) organisation of Iron Ore Exporting Countries (IOEC) Comrade Colin should start doing the next best thing and ramp up royalties on Iron Ore until the pips squeak!

With all that sunk CAPEX (and no more in the pipeline for decades) his window of opportunity is now. Every day that goes by is likely to see Iron Ore prices sink a little lower and the task of extracting juicy royalties more difficult. The politics are much simpler as well. How many Western Australians are going to complain about the State getting a bit more of the proceeds of flogging off chunks of the North West.

Come on Comrade Colin – all it takes is a few regulations. A few whiney miners rabbiting on about ‘sovereign risk’ don’t scare you surely? They can hardly take the ore and their shiny new rail systems and loading facilities with them.

The unions should support Comrade Colin in this exercise as strange as that may feel.

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