The only way Australia and its miners would benefit from any form of co-ordinated iron ore production constraint would be if Brazil could be convinced to add its name to our cartel.
But even with Brazil’s unlikely and illegal embrace of a cartel, the net gains for Australia would be marginal and fleeting, says the most authoritative and technical analysis conducted yet on Andrew Forrest’s contention that Australia’s economy is being abused by its biggest iron ore miners, Rio Tinto and BHP Billiton.
Forrest and his company Fortescue continue to rail about planned expansion, under which both their Pilbara competitors will add about 20 million tonnes to production over coming years, while Gina Rinehart introduces another 55 million tonnes to an already bloated global system.
Having initially taken the Forrest bait on the idea of some sort of market review, governments state and federal promptly backed off after some unusually blunt criticism from the likes of BHP boss Andrew Mackenzie.
But that didn’t settle things for good old Brian Fisher. Fisher is the economist who ran the Australian Bureau of Agriculture and Resource Economics during its pomp as government’s commodity industry number cruncher, and now directs his own firm, called BAEconomics.
In the wake of Forrest’s public and political campaign to curtail other people’s planned iron ore production, Fisher decided to crank the data rather than rely on an informed instinct that said Fortescue’s chairman had got it all wrong. And, after testing global iron ore’s numbers through a “spatial equilibrium” model, so it proved.
Fisher’s modelling demonstrates that even in circumstances where supply curtailment does generate fleetingly higher prices, there is almost universally a net loss for the companies that remove their product and for the host national and state exchequers.
“Across scenarios, the results tell a consistent story,” Fisher and his team write in a paper that will be published on Tuesday morning. “While supply restrictions in a country such as Australia, which produces a significant proportion of global seaborne iron ore, do result in higher near-term prices for iron ore, this effect is more than offset by smaller export volumes resulting in lower revenues overall,” the paper reports.
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