One of the world’s largest iron ore miners, Fortescue, is fighting allegations its chairman Andrew “Twiggy” Forrest invited its largest competitors including Rio Tinto, BHP Billiton and Vale to form a cartel that would put a floor on the commodity’s continuing price fall.
In comments reported in the AFR, here’s what Forrest told a gathering in Shanghai overnight:
“I’m absolutely happy to cap my production right now,” he said.
“All of us should cap our production now and we’ll find the iron ore price will go straight back up to $US70, $US80, $US90. The tax revenues that will generate will build more schools, more hospitals, more roads, more of everything which Australia needs.
“And when you’re just driving for market share at any cost and you’re smashing the revenues of your host nation and you’re smashing the revenues of your shareholders, in the end, you smash your own personal credibility. Why don’t those companies who derive their fortunes from our nation act like grown ups and agree to cap their production?” Forrest asked.
Iron ore prices have halved in the past year, squeezing profit margins for all Australian miners of the commodity. Fortescue is far more exposed to the fall in than the other major miners, which have more diversified businesses. Morgan Stanley this week downgraded Fortescue to “underweight” in line with a downgrade in its iron ore price outlook, while maintaining the ratings for BHP and Rio.
The Australian Competition and Consumer Commission (ACCC) today said it was investigating comments.
“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,” ACCC Chairman Rod Sims said.
“Ultimately, any success in increasing the price of iron ore in an anti-competitive way would be expected to lead to an increase in prices that Australian consumers pay for items such as whitegoods and cars.”
On Wednesday afternoon Fortescue CEO Nev Power stood by Forrest’s comments and was confident no competition legislation had been broken.
Power pointed to a clause in the Competition and Consumer Act 2010 which exempts companies which export a certain amount of product from parts of the legislation. A spokesperson for the company said the ACCC pointed this part of the legislation out to Forrest several years ago.
“The comments made by the Chairman were highlighting the point that a last man standing fight for market share will damage shareholders of all companies and is not in the long term interests of our host nation Australia nor of our customers and those comments were intended to draw attention to the fact that there is provision in Australia’s competition law dealing with the potential for discussions to be held by exporters,” Power said.
Power said the depressed iron ore price – it has fallen from over $100 a tonne to around $55 a tonne today – was not in the interest of shareholders, the government or any Australian iron ore exporter.
“Statements about future production increases as part of a market share-at-all-costs strategy are impacting sentiment that is depressing the iron ore price when the fundamentals of the market are sound,” Power said.
“A strategy of concentrating market share in the hands of fewer is not good for our customers in the long run and Economics 101 tells us that it destroys shareholder value that can never be recovered.”
Analysis released by Morgan Stanley this week shows how various scenarios look for Fortescue over the coming years, and suggest the miner is headed for an earnings trough.
“Our primary concern is that even if prices ultimately improve, they could first go lower as additional seaborne supply enters the market and rationalisation takes time to occur,” Morgan Stanley said in its research note.
With its margins being squeezed by the falling commodity price, Power said investors would want him to focus on profit rather than market share.
“Modern economics sees this strategy of depressing price to concentrate market share as too expensive to be considered rational – it destroys value in a similar way to predatory pricing – and is not in the long run interests of Australia or our customers,” he said.
“Short term over investment creating over capacity inevitably destroys new investment which leads to under investment in the future and drives a boom-bust cycle, which is not in the best interests of customers or suppliers. Rational allocation of capital ensures supply matches demand growth and provides stability and certainty of supply for a sustainable industry for both customers and producers.”
Morgan Stanley’s downgrade came after the miner failed to peak interest from investors for its $US2.5 billion bonds and pulled the refinancing deal last week.
It said if spot prices persist then the company’s $US1 billion debt repayment which falls due in 2017 could be covered from existing cash – but the remaining $US7.8 billion would not be.