COLUMN-Forrest’s iron ore cap “harebrained” or clever tactics? – by Clyde Russell (Reuters India – March 27, 2015)

LAUNCESTON, Australia, March 27 (Reuters) – What’s the real thinking behind Andrew Forrest’s remarkable call for iron ore miners to cap production in order to boost prices?

It’s easy to dismiss the comment by the Fortescue Metals Group founder and chairman as “harebrained,” as did Sam Walsh, the chief executive of Rio Tinto, the world’s second-largest iron ore miner.

It’s possible that when Forrest told an audience on Tuesday in Shanghai that he was happy for iron ore miners to “cap our production right here and start acting like grown-ups”, he was merely having a thought-bubble moment.

But while Forrest, whose company ranks fourth in the world in iron ore output, has a reputation as a charming straight-shooter, it’s hard to imagine that he would be so careless as to float an idea that in all likelihood is illegal and would also bring scorn from his bigger rivals.

There is no doubt that debt-laden Fortescue has been hit harder than Rio Tinto or No.3 producer BHP Billiton by the collapse of iron ore prices, with the Asian spot price .IO62-CNI=SI marking a record low of $54.20 a tonne on Monday, before recovering slightly to $55.50 on Thursday.

Desperate times call for desperate measures, and Forrest’s comments need to be seen in this light.

At the current spot price of iron ore, several analysts estimate Fortescue is losing money for every tonne of the steel-making ingredient it produces.

His company also recently tried to raise $2.5 billion through a bond sale, but scrapped the issue two weeks ago after potential investors demanded hefty interest rates.

The money would have been used to pay off bonds due in 2017, 2018 and 2019, and although Fortescue said there was no urgent need for re-financing, the cancellation of a bond sale shows heightened investor caution over the outlook for the company.

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