Iron ore miners stifled by free market mechanics

With the majors holding a bigger slice of the market than ever, and prices at ten-year lows, the iron ore sector has found itself between a rock and a hard place.

The price of iron ore is making itself comfortable below the US$40 a tonne mark. It was reported at US$37.50 a tonne overnight, and with more supply coming online from major operations, some analysts have suggested it could continue to trend downwards.

Many iron ore ‘minnows’ have fallen off the bus in the last 12 months, squeezed out by the continued decline in the market price. And Rio Tinto chief Sam Walsh this week told Bloomberg Television that those iron ore juniors still “hanging on by their fingernails” should do the responsible thing and bow out before they burn even more of their shareholders’ cash.

Morgan Stanley, in a report cited by several media sources this week, suggested the four largest iron ore producers globally have improved their combined share of supply to 75%.

With such a major share of the market now held by so few operators, Morgan Stanley analysts Tom Price and Joel Crane questioned the rationality of their behaviour going forward.

“What’s needed to buoy the iron ore price?” the pair asked, according to the AFR, “Vale, Rio Tinto, BHP Billiton [need] to end their competitive supply surge and act more rationally in this weakened market.

“Vale’s the last to deliver big tons to the market: if a moderation of its supply-growth strategy is followed by the Australians, this will secure a price above that of market expectations.”

The potential for miners to shorten supply to encourage a price upturn has been discussed since a much earlier point in the current iron ore decline.

Early in 2015, Fortescue Metals Group chairman Andrew ‘Twiggy’ Forrest demanded BHP Billiton and Rio Tinto agree to slow down production. His comments, and those of Fortescue CEO Nev Power were promptly looked into by the Australian Competition and Consumer Commission.

Forrest was in the news again this week, questioning BHP and Rio Tinto’s tactics in an interview with The Australian.

“BHP and Rio are just expanding and cutting their own throats,” the iron ore magnate told the paper.

But Rio, which also spoke to The Australian this week, defended its tactics, saying China’s $4bn investment in Vale’s supersized iron ore carriers in May was one indication of the globally competitive environment Australian miners were forced to take part in.

“The Brazil-China iron ore deals earlier this year and the proposed production increases from non-Australian operations are a stark reminder of how we are vigorously competing against global suppliers for market share,” a spokesperson was quoted by the broadsheet.

“If we stop doing that – the Pilbara producers (in Western Australia) will lose and Australia will lose.

“Australia’s competitors will happily relieve us of market share if given half a chance.”

With that in mind, what the miners do in the next 12 months will be interesting.

Morgan Stanley believes Vale may slow the ramp-up of its massive S11D project, while BHP and Rio could slow growth or cut production.

While that might be best for the market as a whole, the miners are more likely to do what’s best for them.

Therein lies the rub.