Andrew Forrest’s eye-popping call for the world’s big iron ore producers to drive the iron ore price back up by capping their production shows what crazy things the desperate can do. Twiggy even made his “national interest” call in Shanghai, among Chinese buyers of the iron ore dug up by his own Fortescue, Rio Tinto, BHP Billiton and Brazil’s Vale and just as he was about to meet Xi Jinping.
The Fortescue founder is a man of bold ambition and enthusiasm: creating the third force in Australian iron ore, enlisting the Pope to help end modern slavery, and pushing Tony Abbott to narrow indigenous disadvantage. He won’t end up behind bars for his latest big idea, but he is calling for what both Joe Hockey and ACCC chairman Rod Sims suggested would be an illegal producer cartel. As our Matthew Stevens asked: What was Forrest thinking?
Twiggy’s call is a spectacular sign of Australia’s big iron ore price squeeze. Forrest became a billionaire in the 2000s by creating Fortescue on the back of the China boom that drove the iron ore price from US$20 or so a tonne to $US180 a tonne. Now supply has belatedly responded to the increased demand, the price has hurtled back into the US$50s. That’s crunching Fortescue’s margins and forced it to keep producing more to keep its head above water.
In fact, in the past four years, Fortescue has boosted output more than Rio or BHP. But that’s just kept driving down the price towards Fortescue’s cost of production. Last week Fortescue pulled a $2.5 billion bond issue in New York after investors demanded a yield of up to 9 per cent – higher than Greek debt. Forrest claims that the three Australian iron ore majors are stuck in some sort of prisoner’s dilemma, where the separated prisoners dob on each other even though it’s in their best interests to cooperate by staying mum. So Forrest wants them to collude. But this is not how Rio and BHP see it. They see Twiggy’s Fortescue as the wounded antelope, ready to be taken.
As they drive their production up and global prices down, they are also reducing their unit costs and pricing competitors such as Fortescue out of the market. They’re playing their own game theory. So Rio’s Sam Walsh called Twiggy’s outburst hare-brained, claiming it would be against Australia’s national interest to reduce the production of its biggest export. “I don’t know what Andrew was thinking,” he said.
Yet not everyone disagrees with Twiggy’s underlying point. Glencore’s Ivan Glasenberg- who would like to stalk Rio – slams the majors for feeding over-supply as prices are falling. And Walsh and BHP’s Andrew Mackenzie themselves are being damned as “dumb” by West Australian premier Colin Barnett for undercutting the iron ore price and smashing his budget, which is based on royalties from a $US122 iron ore price.
For the rest of this editorial, click here: http://www.afr.com/opinion/columnists/a-word-from-the-editorinchief-march-27-2015-20150327-1m9rty