Iron ore miners should leave the market if they can’t compete – by Richard Heaney (The Conversation U.S. Pilot – May 19, 2015)

Richard Heaney is the Winthrop Professor at University of Western Australia

Iron ore prices are plummeting, federal budget tax receipts are shrinking and Fortescue Metals Group chairman, Andrew “Twiggy” Forrest, reckons he knows who is to blame: BHP Billiton and Rio Tinto.

Forrest says these competitors drove down prices by flooding the market with product and has pushed for a federal parliamentary inquiry into their actions – a prospect Prime Minister Tony Abbott is said to be considering.

Forrest told ABC RN Breakfast last week that, “When the chief executives of two of the most important companies to Australia both talk the market down, both say they’re going to oversupply the market there’ll be a lot of collateral damage to the Australian economy, employees by the tens of thousands, companies, and we no longer have a free market.”

On Tuesday, BHP Billiton CEO Andrew Mackenzie responded by saying his firm has been a “very responsible fair producer” that had already partially slowed production, adding that:

“… it’s a normal free market; if you allow it to remain free, it will allow the customer to enjoy the lowest cost of supply and therefore the most sustainable price and that stimulates demand and it’s good for the world economy…
our prime customers in north Asia will be extremely disappointed that they paid high prices for iron ore to stimulate new production and then they expected of course that the price would come back to normal.”

Mackenzie has a point. It seems sensible for high cost producers to either reduce their costs or leave the market if they cannot compete.

Playing a long game

It would appear that both Rio and BHP Billiton are making production decisions that are consistent with very long term, low cost operations. The astronomical prices of the last 10 year mining boom were a pleasant aberration, and many see the current lower prices as a price correction.

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