An inquiry into iron ore is a stupid idea, but here's how Australia should do it anyway

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Andrew Forrest’s attack on his two big competitors in the iron ore market is gaining traction, with the prime minister yesterday appearing to give tacit support to a parliamentary inquiry to be lead by Liberal backbencher Angus Taylor.

It has brought howls of protest from Rio Tinto’s CEO of Iron Ore, Andrew Harding, who told the AFR that there could be “extraordinary” ramifications for Australia. He said he was “absolutely stunned”, adding: “there is a reality dysfunction. The commercial reality of it all gets overlaid by the claim ‘that is rubbish’ and ‘that is not how it works’, but no one ever goes on to explain how it works in the alternative.”

He reckons Australia’s reputation around the world and commitment to free and open trade is at risk.

It’s a theme picked up by former BHP Billiton chairman Don Argus who was out supporting the miners this morning. Argus told The Australian today that Australia will be “a laughing stock of the world because, in a market economy, prices will determine what is produced, how it’s produced, and who will get the things we make.”

He added that, “A market economy uses prices as signals telling us how to use ­resources.”

Argus is forgetting that Australia’s biggest customer is China, which manages a planned – not free-market – economy.

Argus is right though. Does Australia really need out biggest resource export becoming, in his words, a “political football.”

Of course not.

But Forrest might also be onto something.

Barchart – June 2015 62% Fe CFR China Iron Ore Swap Futures

Sure the bounce in iron ore since the April low might have more to do with cyclical factors and restocking in China. It could also have plenty to do with the pessimistic crescendo that Joe Hockey’s inadvertent call of the bottom in iron ore represented.

But, equally the changed language from BHP and Rio Tinto and the announcement of a reduction in the expansion plans of the other mining behemoth, Brazil’s VALE, has also been a big part of the recovery in prices.

At its core it is the language the big miners used which is at the heart of Forrest’s argument.

In the comments from Argus, and from the current management of Rio Tinto and BHP since Forrest’s campaign started, this is all about free market forces driving the iron ore price lower. Forrest argues that it is the aggressive “language” surrounding the increase in production and the plans of the big miners – not the increase of production on its own – driving prices down.

We know how important language can be – the RBA has been constantly talking the Aussie dollar down for a few years now.

That makes Forrest’s recent comments all the more poignant. Recently in the News press he said:

What is really galling is that the price has fallen off a cliff not just because of international forces beyond our control but because of the words and actions of companies, particularly London-based multinationals, who mine and export our iron ore.

Now I believe in free markets, but when CEOs pursue business strategies which flood the market, in a last man standing race to the bottom, we don’t have free markets.

Indeed, Rio boss Sam Walsh is the best example of the changed rhetoric from the big miners. Walsh has gone from being unapologetic about the impact of Rio’s actions on competitors to “taking no comfort in what is happening to some of the smaller, higher-cost iron ore producers that are finding it hard to compete.”

So what to do?

A political inquiry with all the grandstanding that will accompany it can’t help anyone really other than raise the profile of those undertaking the inquiry and wasting precious resources pursuing uncertain ends.

Does anyone really think the Australian government is going to impose quotas on production or shipments through Port Hedland? Does anyone rally think that after more than 30 years of economic reform that the government is going to roll all the way back to the Wool Reserve Price Scheme?

Dreamin’.

What Twiggy is saying, without being explicit about it, is that the big miners are abusing their dominant position in the market.

That being the case Australia already has both a law and the body to investigate BHP, Rio and anyone else in the Australian economy’s conduct.

Section 46 (1) of the Competition and Consumer Act 2010 deals with the Misuse of Market Power and says:

A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of:

(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

(b) preventing the entry of a person into that or any other market; or

(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

The body who oversees and enforces this law is, of course, the ACCC and they have a clear test for the misuse of market power.

Importantly the ACCC says the possession of market power is not itself unlawful. Rather it is the misuse of that power. Here are the three questions the ACCC says the the courts will consider in such a case.

  • does the company have substantial market power?
  • is it taking advantage of that power?
  • is it using the power for an illegal purpose?

It is up for the court to decide on these points.

In many ways Andrew Forrest’s campaign has already succeeded. But, if Australia is to really have an inquiry it is the ACCC – not the Parliament – which should conduct it.

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