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.
Categories: Macrobusiness
The Glass Pyramid 
http://www.macrobusiness.com.au/2015/05/twiggy-inquiry-dies-wall-opposition/#comment-1338430
dennis,
As RT would say ‘you have answered your own question’. The reason they object is nothing more than it fits some ‘free market ideal’. I have had this discussion with numerous of my free market enthusiast associates in recent days and it becomes clear that they have no answer beyond ‘..because i think free markets are best…’
Once you walk them through the issue and the facts they eventually accept the following:
1. Australia even without Brazil still has and will continue to have for some considerable time massive market power in low cost high volume iron ore supply
2. From the perspective of Australia it makes no sense for it to allow Australian miners to compete against each other as against foreign suppliers in the international market anymore than it would be for a company to allow two of its production factories to compete against each other.
3. A national export volume cap is nothing more than a simple device to ensure that the Australian miners do not compete against each in the international Iron Ore trade. It does nothing to stop them competing against foreign competitors as indeed they must.
When RT and others continue to insist that somehow this violates some natural law they are simply revealing a ‘faith’ like belief system.
Especially when the rest of the world would have no hesitation in approaching the problem in the manner I describe. Check out an Economist’s response to me on twitter when I said it is the right of every country to decide how much of its resources it will permit to be exported.
He agreed they did but said they just shouldn’t. The “just because” school deployed by an economist even though we are talking about the potential loss of billions in national income simply because people do not want to think an inch or two outside of a box that is purely in their mind.
Breathtaking stuff.
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“Would not that require the miners to take that into account and make them less efficient? Do we control that much of the market?”
These are all things we can find out from an inquiry dennis, and I would further add that we probably want to take back control of building and maintaining the docks and ports ourselfs — its all largely electronic anyway and would give the government something useful to do besides dreaming nappy thickness regulations….
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Good questions from Oliver47
The current IO market gyrations show how archaic are our existing arrangements for managing our natural-resouces based export income.
Auctioning of Commodity Export Volume licences is an interesting idea for returning more “Producer Surplus” to Australians, the ramifications of such a revolutionary idea (I’m unaware of precedents, although they probably exist in developing countries)) need to be identified, through Q’s such as –
1) Royalties (ie., a depletion tax, arguably too low on all minerals in Aust., which goes to the States and who may seek to capture more)
2) Should all commodities, including Gold, be subject to the same licence auction regime?
3) Income tax revenues (Would a licence auction be a dis/incentive to transfer pricing and other tax-minimising tactics?)
4) Commodity Export Volume licence auctions might (at last) encourage value-added processing in Australia, but how is the Indonesian ‘experiment’ going?, and do we want jobs in “dirty” industries/externalities?
5) Would such a regime be equivalent to “nationalisation-by-taxation” of our mining sector?
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And the response
Oliver47,
I don’t think it is very revolutionary as governments around the world have been controlling exports of key resources for years. Australia still carefully controls who we sell Uranium to and possibly how much as well. I am not sure whether anyone has thought to auction the rights to volume allotments but I am sure it would have occurred to more than a few treasury staff (hint hint Mr Hockey).
1. States can still levy their royalties and no doubt miners will bid in a way that reflects any fears they may have about states ramping up royalties during the period of an export licence. But generally states seem to be fairly sluggish when fiddling with royalties and the same concerns apply when they do – will a miner shift to a different state.
2. The approach may be suitable to other exports but a case by case approach is warranted. It is really only necessary when there is a real concern that local producers may in competing against each other under cut a foreign producers lowest price. Iron Ore is ideal because it would be very hard to smuggle out some bulk carriers loaded with dirt.
3. Not sure whether it would stop transfer pricing tricks but at least the miners cannot get around the need to pay up front for the export volume allotment and competition for those allotments is likely to be fierce – at least while Australia maintains a significant market advantage as a high volume low cost producer. If that situation changes then the bids for the export permits will fall as the gap between the local cost of production and foreign cost of production narrows.
4. It might well encourage local value adding because clearly iron ore sold to a local steel works would not require an export licence.
5. I would not regard setting an Export Volume cap and auctioning off allotments as nationalisation by taxation. The miners still remain completing private and they can sell the iron ore off shore for whatever price they want. The only intervention by the government is setting the export volume – apart from that the glorious powers of competition in the form of miners trying to produce at lowest possible cost and fight for market share remain intact. The only thing they will find is that they do not get to do it with our iron ore.
A few free trade fans have suggested that this is somehow anti-free trade. I don’t think it is any different to a private company with a number of factories producing identical goods preventing those factories from undercutting each other in the market place. Like such a firm Australia simply wishes to ensure that its mining “production units” only compete against the offshore competition and not against themselves.
It doesn’t even need to own those production units to do so.
Some have suggested that the Chinese may not take kindly to Australia making decisions as to how much of our iron ore we choose to export. Well that is as ridiculous as it sounds even without regard to Chinese ongoing record as a Master currency and market manipulator (would you like to buy some Chinese rare earth minerals – sorry sir that is not on the menu).
The main reason there is a an ore glut at the moment is that China is keeping large volumes of much high cost Iron Ore production IN the market. That is blatant market manipulation and far beyond simply setting a National Export Volume cap.
Had we put a cap in place about 10 years ago and adjusted upwards as required much of the current excess CAPEX might have been avoided.
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http://www.macrobusiness.com.au/2015/05/iron-ore-war-turns-twiggy/#comment-1334362
Flyingfox,
It is not FMG missing out, FMG is a massive red herring, when Australian miners compete against themselves on price Australia misses out. It is a very simple example and certainly the situation is not that simple but the link my comment above illustrates the difference between Australia as an iron ore producer and a bunch of Australian mining companies.
I am not suggesting it would be a perfect solution but it has to be better in terms of the national interest than what we are doing now.
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http://www.macrobusiness.com.au/2015/05/iron-ore-war-turns-twiggy/#comment-1334404
“…But I would think this would happen regardless..”
How would Australia extract the revenue from auctioning export volume licences other than by doing so?
The global trade is approx 1.3B tonnes and Australia produced about 720 M tonnes in 2014.
If we were to auction off say 700M tonnes in export volume licences per annum for 2015 – 2017 who would bid for them and how much would they bid.
Depends how hungry they are but there is a good chance that they would bid a chunk of the gap between their cost of production and what they think the market price will be with the cap in place and further export expansion by Australia limited. We are talking serious cash.
Though I have suggested that Twiggy and the other Juniors might not survive such as system because they would be outbid by BHP and RIO – that may not necessarily be the case as BHP and RIO may not want to outbid for the licences. Keep in mind that every dollar they bid per tonne is a dollar off their profit. They may have other considerations and that may mean that some of the hungry juniors can win some allotment event though they have higher costs. It will be exciting to watch the miners horse trade and scratch each other for a slice of the export volume cap.
The important point is that the Australian taxpayer is sitting at the auction cashiers desk and maximizing its return from the export of OUR IRON ORE!
If the Chinese finally decide to shut down some of their mines we might even consider raising our cap as the Chinese mines represent a large chunk of the 1.3B tonne production and they do so at much higher cost..
Joe Hockey might find a nice little stash of cash in his budget that he did not expect.
And yes and if super low cost producers who can produce in unlimited volumes suddenly appeared we would have to accept that the auction permits from selling volume licences would recede to zero as the gap between our local miners cost of production and the costs of foreign competitors will have receded to zero.
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I think selling a national export allotment auction to the public would be pretty easy.
All that the government would be doing is selling the allotments to the highest bidders. Who could argue with that (apart from 3d1k).
“The government is deeply concerned about the iron ore market and the risk that our own miners might compete the price down unnecessarily.
Every nation has the right to decide how much of its natural resources it will make available for export and when it will do so.
The government has decided that it will impose a National Iron Ore Export Volume Cap and all the Australian miners (and other interested parties) will be free to bid for allotments under that cap. A competitive auction is the fairest and most transparent way of ensuring the export volume allotments end up in the hands of those miners who value them most.
The proceeds of the auction will ensure that Australian citizens do not bear the cost of any decisions by Australian miners to compete against each other in the international market using a national resource.
The initial auction will be for 700 one million tonne allotment lots for each of the 5 financial year 2015/16, 16/17, 17/18, 18/19, 19/20
Additional allotments may be auctioned during these periods if the government considers that it is in the National Interest to do so and any allotments sold by auction may be re-purchased by the government for the auction price with 12 months notice.”
The miners can do as they please – they can export their allotment, sell it if they decide not to dig, sell the ore at whatever price they like but the position of Australia as a nation is protected.
700 * 1 million tonne allotments would make a nice little auction of 700 lots.
Let anyone bid as that will stop the miners colluding at the auction. If they want to export they are going to have to buy the allotments!
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http://www.macrobusiness.com.au/2015/05/iron-ore-war-turns-twiggy/#comment-1334357
The only reason Twiggy has got any traction at all is that many understand the lunacy of Australia competing against itself in an international market where it clearly has market power as a result of its low costs of production and mega volume capacity.
What seems to be causing the confusion is that a Proper Iron Ore Inquiry that makes a recommendation in Australia’s interest cannot really help Twiggy for a simple reason. Such an inquiry will recommend national export volume limits with the rights to export sold by auction and in such an auction Twiggy would be outbid by lower cost producers.
So we are in a weird situation where lots of people are opposing something we desperately need, an Inquiry into the Iron Ore industry, because a person who would not benefit from it is asking for it.
Still waiting for someone to point to any data that demonstrates that Australia (or Australia and Brazil) do not have (and will not continue to have for a considerable time) massive market power having regard to their low costs of production and volume capacities.
http://www.macrobusiness.com.au/2015/05/barnett-abandons-twiggy-inquiry/#comment-1334138
But as it appears the call for an Inquiry will be snuffed out it looks like we will maintain our traditional Aussie approach of allowing Australia Iron Ore to disproportionately serve the private interests of largely foreign owned mining companies.
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Pfh,
HnH has explained the big IO strategy previously and it tottally makes sense. In that context, an enquiry is a pointless waste of money.
There is no conspiracy – what they are doing makes sense – entirely.
If you are worried about corruption – back an ICAC in all jurisdictions all the time …
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HRHolden,
i have made no suggestion of conspiracy. BHP and RIO are doing exactly what is in their shareholders and bond holders interests.
The problem that most of you are overlooking is that there is a distinction between their interest and the national interest when, having regard to the cost of production and volume capacity of foreign competition, Australia ore needs only beat that foreign competition and not other Australian producers.
The only reason the price of ore will approach the marginal cost of the lowest cost Australan ore is if we allow Australian miners to compete against each other unecessarily.
The only way to stop that in a relative efficient and transparent manner is to limit national export volumes. Note: this does not involve directly setting a price but the National volume will be set at a level that takes a few things into account – the international demand for ore, the cost structure of foreign competition and their production capacity, plus also concerns re unbalanced economic development in Australia. Sometimes gorging on a good thing is not in the national interest.
Getting the volume cap 100% right is not essential as if the resulting international prices are too high – i.e. allow foreign producers to get excited – we just raise the national cap slightly.
Likewise if demand falls and the price gets too soft some of the cap can be withdrawn.
The miners bid for a slice of the cap and they can then sell that ore at whatever price they choose.
People seem to have this weird belief that the iron ore market is some sort of perfect efficient commodity market even though China are happily creating a massive glut by maintaining extremely inefficient mines in operation producing large volumes of ore at high cost.
The sensible response by Australia is to supply the market with as much ore as the market wants at a price just lower than Australia’s foreign competition.
From the perspective of BHP and RIO other Australian miners are the real competition.
That is the difference between the national interest and their private interests.
The only serious objections that have been raised to date seem to be sheer horror that the government might interfere in a market in the national rather than private interests
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Skippy,
Good point – though my statement was only intended a response to the suggestion that I was alleging a conspiracy between RIO and BHP.
Even and HRHolden
A simple example makes the point.
Assume international demand is 1000 units and foreign capacity is 500 units at a production cost of $50. Australia can produce unlimited units at a cost $25 per unit. Australia could decide to sell only 500 units at $50 and leave the Foreign produces to the remaining 500 units at $50. In this scenario Australia makes $25,000.
If Australia wanted to it could offer buyers 1000 units at $49 – though only a dollar discount most if not all buyers will take it and Australia earns 1000 * $49 = $49,000 instead of $25,000
But lets say instead of Australia we are talking about two large mining companies both of whom are permitted to export as much ore as they liike.
When one decides to drop the price to $49 to steal business from the other ‘Aussie’ firm and the foreign countries, the foreigner can do nothing but the other Austraian company can cut their price to $49.
The first company retaliates and the process continues until Australia has sold 1000 units at close to $25. Total income from the sale of 1000 units of Australian Ore is only $25,000.
Instead of that lets say we impose a national cap on export volumes of 1000 units and invite company A and Company B to bid for the right to export that Iron Ore in 100 unit lots.
How much will each be willing to pay for the right?
Something pretty close to $25 per unit because their cost of production is $25 and the foreign competition cannot go lower than $50. Lets say $24.
The Australia govt says thank you fellas for the $24,000 you just paid for the export volumes licences and the miners then go off and sell their licences volume into the world market at $49 per unit ($25 + 24).
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http://www.macrobusiness.com.au/2015/05/barnett-abandons-twiggy-inquiry/#comment-1333362
Comrade Colin may have been misquoted – I think he meant to say
“If it’s not anti-competitive, the only other thing that could be done would be to impose restrictions on exports. National restrictions on export volumes are not in the interests of a lot very large mining companies who are prepared to flood the market with Australian Ore to lessen the pain for shareholders and bondholders who paid for a bunch of dud CAPEX that should already be in mothballs”
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http://www.macrobusiness.com.au/2015/05/barnett-abandons-twiggy-inquiry/#comment-1333456
Double Bingo!
A proper Iron Ore Inquiry should never be about Twiggy and his ‘needs’ nor Comrade Colin for that matter. It should be about one thing – the national interest and the appalling prospect that Australia is going to allow a lot of miners who made dud CAPEX decisions to flood the market with “our ore” in the desperate hope of retrieving some value for their shareholders and foreign bond holders.
Sad that the understandable antagonism by many towards Twiggy is blinding them to the urgent need for a thorough inquiry into the policy failures of both major parties over the last 10 years in relation to Iron Ore.
Could someone please wake up the Greens – this issue should be right up their alley.
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So Abbott is getting cold feet about an Iron Ore Inquiry
http://mobile.abc.net.au/news/2015-05-19/tony-abbott-distances-himself-from-proposed-iron-ore-inquiry/6481368
As Abbott backs away while BHP and RIO bleat more stridently and Comrade Colin realises there is a risk that an Iron Ore Inquiry might poke around more than a few murky holes, perhaps a few more people might start to understand why a Proper Inquiry into Iron Ore was vital.
Though Twiggy wanted an inquiry, the Inquiry that was needed would have not have had his (or other juniors) interests at the top of its agenda. Instead of grabbing Twiggy’s misplaced enthusiasm and getting the Inquiry up before anyone thought it through – many simply wanted to poke a twig into Twiggy (and any other operator of a junior mine) by decrying whatever twiggy wanted.
Well now the penny seems to have dropped at Big Mining mission control and there will be no more talk of Inquiries into the conduct of the Iron Ore industry. (“Copy Canberra? Copy Canberra?”)
Yes, looks like we will be left with no Inquiry and a mining industry cutting each others throats with OUR ORE to satisfy their foreign owners and bond holders panicking about a lot of dud CAPEX.
The Road Runner of corporate and finance interest escapes, yet again, with a Beep Beep.
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I had a look for more recent data on the costs of iron ore producers as there were some concerns expressed that this Reuters article was wrong in its comments on the costs of African production.
http://www.reuters.com/article/2015/05/15/us-africa-iron-insight-idUSKBN0NZ1WR20150515
And concerns were expressed that this alphaville article is out of date.
http://ftalphaville.ft.com//2012/07/30/1099681/iron-ore-going-down-down-down/
As a third attempt here is a link to an RBA 2014 report and the graph shows the costs for Australia, Brazil, China and the rest of the world.
Click to access b.pdf
Up to $60 it seems to be all about Australia and Brazil with the Australian volumes just blowing everything else out of the water.
I might be missing something but who are the rest of the world producers whose current costs are above (and sometimes well above – China) $60 that are able to produce at the low costs of production of Australia and Brazil and importantly in the volumes that Australia and Brazil can deliver.
That big Guinea mine is still 5 years away from production and even at current prices seems doubtful – if they are having second thoughts at current prices why allow Australian producers to undercut current price by competing with each other? https://sourceable.net/investors-grill-rio-tinto-simandou-iron-ore-mine/
This is not about fixing a price – especially a price that keeps Twiggy alive or any of other juniors (Gina wants to know why 3d1k no longer returns her calls). The issue is much simpler than that.
Why would we want Australian producers to significantly undercut, by competing between themselves, the lowest price that rest of the world foreign producers can deliver?
According to that RBA graph below $50 there is no almost zero competition other than Brazil. So why would it be in Australia’s interest to have Australian producers drive the price down with surplus volume much below $50.
When we do push the price below $50 it seems that we are largely competing with ourselves and if we got to learn a bit of Portuguese the floor price would be the cost of the first serious volume non-Oz or Brazil producer (i.e more like $75 or higher – Chinese production is much higher) Why not let the rest of the world set the floor price?
That is going to be a lot more attractive for Australia than letting BHP and RIO set the floor price using our low cost of production ore.
One final reason why a move to a national export volume model allocated by auction remains vital (apart from it upsetting 3d1k) is that had it been in place back in 2010 or adopted in 2010 rather than the daft RSPT/MMRT model we may have had some chance of avoiding the crazy explosion of CAPEX that twisted the economy out of shape and helped push the dollar through the roof..
People wouldn’t have incurred the CAPEX if they were not able to secure export volume permits.
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A comment from Mr WW
PF, again plenty of research there, but the IO is only half the story.
IF we jack up the price of the raw material the steel makers will jack up the price of the steel we need, include SS steel we use for the petrochem projects, we get done like a dinner cause the markup on the steel will be greater than the cost increase on the IO.
Unless as HnH proves the high cost producers get out of the way of the more efficient producers, the Australian public get to carry the inefficient IO miners through the price of steel.
We just cant afford Twiggy.
He aught to bugger off out bush somewhere and chase a few kangaroos for a while. WW
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WW,
As far as I know we are not planning on building a Sydney Harbour Bridge between Sydney and Perth any time soon. Assuming there is a small increase in the cost of stainless steel that we want to buy, and that is clearly not likely considering how little most prices rose when iron ore cracked $180, that extra amount will completely pale by comparison to the extra income earned by NOT allowing miners mining our Iron Ore from driving the price down by competing with each other.
For extra clarity – this is not about Twiggy and it is not about ‘carrying’ the juniors. It is not about limiting competition between Australian miners as against limiting competition between Australian Miners as against the rest of the world.
Why give the world an iron ore discount because our miners want to pump supply to cover their CAPEX mistakes?
Set a national total export volume and have the Australian miners bid for export rights for that volume.
The lowest cost producers will generally be the ones who will bid the highest price for the right to export volumes as their costs are the lowest. That means Twiggy and the other juniors are still heading out backwards if their costs are not within a bulls roar of the big players.
But what it does mean is that the national total export volume can be set at a level where the resulting international price is likely to be just a bit lower than the floor cost structure of the rest of the world volume producers.
That means Australia is selling its ore into the international market at a price that undercuts the off shore competition by as little as possible.
Even better because the miners have had to bid for the right to export some of that total and limited export volume a bigger return will go to the taxpayer.
Sadly RSPT crowd and others are so crazed (with plenty of justification) by their hatred for Twiggy for his lobbying efforts in 2010 that they want the nation to cut off its nose to spite its face and essentially let BHP and RIO do whatever they want in the interests of their mostly international shareholders.
Some of the stuff that is getting written about this Inquiry is just remarkable but what is truly revealing is that the ONE truly compelling argument for allowing Australian dirt to be sold for marginal cost by international miners – to allow poor chinese consumers and other foreign consumers access to cheap steel and other products produced with iron ore – rarley gets a mention.
It doesn’t sound so attractive when you are arguing that the best reason for not having an Iron Ore Inquiry is that it might prevent foreign consumers and buyers access to Australia commodities at the lowest cost possible.
A lot of people might start asking why we are so hell bent on selling our minerals at the lowest possible price instead of the highest possible price.
And the answer will be – “Well Twiggy is an unpleasant character and the sooner he and Gina is gone the better”
A proper Iron Ore Inquiry is not about Twiggy or some Junior Cartel or ‘setting’ a price for the Iron Ore clip (like the old wool scheme).
It is simply about placing a limit on the volume of Australia Iron Ore that can be exported in a specific period – possibly in co-operative with Brazil.
It is a very straight forward proposition but as it is contrary to the interests of BHP and RIO we can expect that it will be resisted tooth and nail and uphill and downdale.
3d1k – the junior’s fair weather friend – is probably the best indicator available of why the proposition has a lot going for it. He has a finer nose for shifts in the wind than the best trained truffle hound.
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PF Wow, “Set a national total export volume and have the Australian miners bid for export rights for that volume.” Your line has merit, I’m going to have to think this through, but just off the top, how about the JV owners such as Citic and many of the juniors are in JV relationships with the buyers (Chinese)
And if we precedent this, how about the LNG industry, the sugar industry and the live animal export trade, the agricultural grain industries for example. What will the TPP make of this.
This is a major can of worms. WW
Just thinking, how are you going to tell Gina she has missed the cut, she will be back on the board of the AFR in an instant.
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WW
“….This is a major can of worms. WW…”
It need not be. Had someone said in 2004 that rather than let the economy get twisted out of shape that the maximum national volume of iron ore was going to be limited at specific levels over the next 10-15 years no one would have blinked an eye. They would have said – yes it is sensible not to put all our eggs in one basket and encourage a mad CAPEX explosion and a fair way of doing that is to auction the export volumes to the highest bidder.
No reason the same thing cannot be done with LPG – limit the total volume available for export and let the players bid for those rights. That will allow some capacity to be reserved for the local market without ripping open every farm gate and destroying excellent agricultural land.
The fact there are joint ventures and various other ownership structures does not really cause a problem as those joint ventures are perfectly entitled to bid for the volume licenses. If they don’t bid or get out bid – too bad – they should have been more efficient.
Much much harder for any mining to kick up a stink if they miss out on some export volume licences because the argument against them is that they were too cheap and too inefficient to make a winning bid.
Explaining why a maximum volume limit is in the national interest is not difficult as the objective is simple – stop Australian miners driving down the price by competing with each other.
The bizarre bit about this debate is that there is clearly an arguable case that Australia has pricing power on its own and has massive power with Brazil but everyone is claiming that is not true.
If it is not true show me these mega volume low cost producers outside of Brazil and Australia.
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WW
PF, I note your arguement, I am more of a practical guy who gets the best feed back from experience.
Hows this for a story. I was in the wool stores at Freo a few years back and the warehouses were full, there were bales stored outside, there was nearly not enough room to park a car. I asked my guide a Mr Holmes A Court, what was going on, he told me “this is what happens when you try to manage / manipulate a market”. Someone smarter than me will know the academic solution for IO, but for me the answer is let market forces prevail, as you never really know what is going on behind the scenes. WW
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Mr Holmes a Court was close to the mark but the wool system involved a guaranteed price for wool and as a result too much wool was produced even as the demand for wool was falling around the world.
I am not suggesting a guaranteed price at all. Merely that the total volume of Iron Ore exported is subject to a cap – and that may be a fairly large cap – especially as the objective is only to discourage miners who have over invested in CAPEX from flooding the market in a desperate attempt to save their shareholders bacon or in the attempt to crush competitors with pricing that is predatory (from the perspective of the floor price (cost floor) of most of the off shore competition).
With a national cap in place let a competitive market reign and let the Australian miners fight like alley cats to bid for an export entitlement.
Once they have their export volume entitlement they can sell the ore off shore for whatever they want. The point is that they will have already paid the tax payer for the export licence AND because of the volume limit the international market price will tend to be higher.
As for what will China think – they already do this with rare earth minerals. No one tells the Chinese they are obliged to let miners come in and dig up everything they can and sell it offshore at the lowest possible price. If anything the Chinese must be laughing watching the majority of the Australian economic commentary try to argue that it is not in Australia’s interest to manage its competitive advantage (oodles of super low cost ore) to best effect simply because a bunch of miners got their forecasts wrong.
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Further transmissions
I think a lot of people assume that just because Twiggy is calling for an Inquiry that there is no reason to hold one.
That report by reuters on the weekend suggests that there is almost no international competition at prices much below $100 per tonne (apart from Vale). So how on earth can it be in the national interest for Australia to let Australian miners drive the price down any lower than is required to keep potential market competitors out of the market or struggling for breath.
http://www.macrobusiness.com.au/2015/05/weekend-links-16-17-may-2015/#comment-1324644
We should not let bad CAPEX decisions by the miners and their squabble for market share undermine the national interest.
Sure our production will end up being controlled by RIO and BHP as the lowest cost producers but that is no reason to flush billions in national income down the toilet along the way.
And this
That report does not sound that different to this Alphaville article (that referenced MB) which shows that when the price gets close to FMGs cost of production (circa $60) almost all non -Australian and non-vale production is unviable.
http://ftalphaville.ft.com//2012/07/30/1099681/iron-ore-going-down-down-down/
Which suggests that if Australian producers drive the price much below the cost of production of our off shore competitors they are doing more than is required to maintain Australia’s market share – which is the only thing that matters.
Which suggests Twiggy has a point even if it may not help him as much as he hopes.
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It’s certainly not a crazy idea for Australia and Brasil to assume such a relationship, even if you only got 20/30 years out of it, might give us time to diversify the export sector (Bwaaahaaahaahaa)
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The advantages of a system of national export volume licences include avoiding the current problem in the first place as some of the most over the top capex spends and mine expansions would have been discouraged had the operators not been able to acquire the necessary export licences.
In addition the rate of expansion of the industry might could have been moderated to avoid the problem of the bubble of mining CAPEX generating distortions right across the rest of the economy. If the Howard and Rudd/Gillard/Governments and the RBA had been inclined not to throw the economy under the mining boom bus a system of export volume licences would have allowed them to manage the boom so that other sectors of the economy (manufacturing, services etc) were not left high and dry by an $AUS flying skywards as the boom sucked in massive exchange rate inflating capital inflows.
And for those who are Green inclined – a system of national volume limits would allow speed limits to be applied on the process of becoming quarry land.
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