Regulators worried about Fortescue's 'cartel' talk are missing the bigger picture

ACCC chairman Rod Sims

Fortescue Metals chairman Andrew Forrest has raised the ire of Australia’s competition watchdog by wondering out loud why the big iron ore miners don’t collectively cap production to stop what looks like a continuing fall in the price or iron ore.

ACCC chairman Rod Sims said yesterday that the ACCC “will be looking closely at Mr Forrest’s comments and the context in which they were made. In general terms, any attempt by Australian businesses to encourage competitors to restrict outputs is a matter of grave concern to the ACCC.”

He’s been accused of suggesting a cartel which no-one would normally favour.

But I wonder why the ACCC is so concerned about the impact of Forrest’s idea on “prices that Australian consumers pay for items such as whitegoods and cars”, when it has shown no concern for the impact of the actions of the big miners – in ramping up production and driving down prices – on other much smaller players in industry.

Thta’s particularly the case when it seems an open secret in the market that the increase in productive capacity, and crucially, use of that productive capacity, is aimed at driving high-cost producers out of the market.

Morgan Stanley highlighted this in its Global Metals Playbook published this week:

Rebalancing/restructuring continues: Numerous new mining operations that appeared this past decade are now uncommercial at current prices; many of these have already closed in just the last 6 months. The most exposed of these include low-grade iron ore operations in Hebei province, northeast China; and small operations in Australia and Brazil. As of Mar-15, we estimate that over 210Mtpa of capacity has been cut (idled; reduced rate, closure), representing about 15% of estimated seaborne and China production capability in 2015. Once the industry acknowledges that a lower price environment is likely to persist indefinitely, it generally takes 6-12 months before actual production cuts occur (entities require time to withdraw from industry commitments).

Driving out high-cost producers is a euphemism for driving competitors out of business and a large proportion of the production which has been shuttered is Australian.

If Australia’s banks, supermarkets, telcos or other firms in any industry pursued a strategy that drove prices down to drive competitors out, the ACCC would be busy looking at this conduct.

Wouldn’t it?

The arguments would run, have run in recent years when similar occurrences have briefly happened across the economy, that this strategy is simply to take market share so that the bigger companies can drive out competition and increase prices later.

That appears to be the long-run point of driving out competition in the iron ore market.

That’s anti-competitive, the ACCC would usually say. But on iron ore it have been strangely silent.

Andrew Forrest’s idea might help Fortescue Metals more than most given Morgan Stanley believes that at US $56 a tonne “Fortescue is only generating US$1/t after C1 costs, shipping, royalty, interest, tax, overheads and sustaining capex.”

But my question remains – why is the ACCC only worried about one side of the argument?

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