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
Articles like this suggest the price could be significantly higher than it is now and much of the competitive production will remain mothballed. Even that huge mine in Guinea is not going to be producing ore for 5 years – assuming they build their 600k railway. Will they bother to build massive CAPEX and fire up production if prices are at $70 or $80 and they know Australia can easily ramp up its national export volumes to send ‘upstarts’ back into mothballs, if required.
In current market conditions, it looked unlikely that Australian firm Sundance Resources’ Mbalam mine in Cameroon would get developed or even the massive Simandou project in Guinea, in which Rio Tinto holds a stake, Gray said.
“It is not looking good, it is looking worse by the day,” Gray said. “Those projects which were looking shaky beforehand are now well and truly dead.”
Sure $180 per tonne gets even the dodgiest mine business case over the line but there is a lot of ‘twiggle’ room between $180 and $50 (or lower).
Sure none of this helps Twiggy because if Australia did limit,at a national level, export volumes ( alone or in co-operation with Brazil) the lowest cost producers could out bid Twiggy for the volume BUT that is no argument against having an inquiry as to whether Australia should be allowing two largely foreign owned miners to flood the market with our prime lowest cost deposits well south of a price that other off shore producers can compete with.
The idea that is being floated around the traps, that once BHP and RIO have driven all the domestic and off shore competition from the market they will regain pricing power, is odd as it assumes that Australia (in the form of the two Big Boys) will some how magically acquire pricing power even though the point of this idea is the belief that no one can have sustained pricing power in the iron ore market. And even more magically, this idea seems to infer that those two big companies will then roll over and happily share a larger chunk of the pricing power profits they acquire with the taxpayer.
The only way Australia can reap the full rewards of a BHP and RIO oligopoly is if their combined output is managed in the national interest by the nation – so why wait?
What makes two private mining companies exerting market power (assuming their ore dumping campaign works) okay but not the owners (Australians – indigenous and post 1788 migrants) of the ore exerting market power?
Bring on the inquiry but make sure a National Iron Ore Export Volume cap either going alone or in partnership with Brazil etc is on the table (about time that we started to get friendly with some of the BRICS).
Oh and as for what China thinks about such rough play – take a look at the South China sea. This is not a world full of nice guys. When they and the other FTA “brides” see Mr Robb heading their way clutching FTA paperwork they simply rub their hands and mutter variants on “….candy from babies…”.
Just because the Australian Iron Ore industry went nuts on CAPEX and now want to use their shiny toys (railways and port facilities) does not mean it is in the national interest to let them.
A market flooded with our best and lowest cost deposits at prices well south of the point the off shore competition can match is not in Australia’s national interest.
National maximum export volumes auctioned off to the highest bidders is the way to protect the national interest without nationalisation.
Mr Xenophone, if you are pushing for an approach that allows Australia to get the best prices for its lowest cost of production ores the inquiry must be talking about the introduction of a national system of auctioned and transferable volume licences that allow total national production in a period to be limited and carried out by the lowest cost producer. As Australia currently produces about 720M tonnes out of a world market of 1.3B tonnes a National Iron Ore Export Volume cap of 700M tonnes per annum for the next 5 years is probably a good place to start – for more details click here and here.
The lowest cost producers can bid for the export volume licences at the price that reflects the value of the licences to them (which is likely to be some amount between their cost of production and the cost of production of non-Australian producers) BUT importantly they cannot flood the market with excess supply and if they wish to sell below cost to win market share they do so at their cost and not ours. The Commonwealth government can determine and adjust the national export volume level in the national interest as required.
The states will continue to charge their royalties and the commonwealth collects the proceeds of the export volume licence auction.
Done properly, this approach may not help Twiggy but this Inquiry should not be about Twiggy – it is about something much bigger than Twiggy – the national interest.