In Commodity News 25/05/2015
The Australian government’s decision to reject an inquiry into the iron-ore market capped a tumultuous week during which a bitter debate over the industry’s relentless output expansion, despite sinking prices, has dominated the national discourse.
At the heart of the issue: whether a country’s natural resources belong to the nation, or the private companies that own and operate them.
Australia’s Prime Minister Tony Abbott earlier this month backed calls for the parliament’s economics committee to investigate claims that mining giants BHP Billiton Ltd. and Rio Tinto PLC have been driving down iron-ore prices by boosting production in a way that undermines their smaller competitors, as well as harming the country’s economy.
But in a sign of the rift within government itself over the issue, Australia’s Treasurer Joe Hockey late Thursday officially nixed any plans for an inquiry.
His decision followed an unusually outspoken campaign by the normally publicity-shy mining majors, with BHP’s Chief Executive Andrew Mackenzie saying any probe would be “a ridiculous waste of taxpayers’ money.”
“We were attracted to an inquiry, no doubt about that,” Mr. Abbott told reporters Friday. “But we talked to the various people in the sector and came to the conclusion…that a parliamentary inquiry was going to generate more heat than light.”
Governments of resource-rich countries around the world have often sought ways to get a better deal from their mineral wealth, often by raising taxes on profitable mining companies or by taking equity stakes in projects.
Australia’s last government was embroiled in a major debate earlier this decade over a planned new resources tax aimed at propping up the country’s budget when commodities prices were riding high.
The latest debate is taking place as concerns grow over Australia’s economic prospects now that slowing growth in China seems to have ended the long commodities boom, which helped the country avoid recession for a quarter of a century.
Iron ore’s price drop in particular is eating into Australia’s tax revenue, making it harder for Mr. Abbott’s government to improve the nation’s finances as it promised when elected in 2013. Australia accounts for more than half of global trade in the commodity that is essential for making steel, and iron ore is its biggest export.
Australia’s economic growth has slowed, while unemployment has risen, leaving confidence soft and businesses reluctant to invest. The government recently more than doubled its budget deficit forecast for fiscal year 2015-16 from the estimate it made a year ago, largely thanks to iron ore’s slump. Lawmakers now expect iron-ore prices to average US$48 this fiscal year, 20% below their previous forecast.
In April, iron ore prices plunged to the lowest level in a decade, with analysts attributing much of the slump to a ramp up of supply mainly from Australia, as new mines planned when prices were booming have begun production. Australian iron-ore exports have increased nearly 40% in the past two years, according to government data.
Some now argue big miners are effectively selling the nation’s resources on the cheap to further their own interests at the expense of the wider good.
“The owners of the resources are essentially Australians, right, not the corporations,” said Flavio Menezes, University of Queensland professor of regulatory economics. Mr. Menezes, who backed the proposed inquiry, said the collapse in prices was a public policy issue and it would be “a very costly mistake” for government to ignore.
Smaller mining companies, whose profitability has suffered as iron ore prices have fallen, have piled in. They typically face higher production costs than large companies like BHP and Rio, which benefit from technological advantages and economies of scale.
Andrew Forrest, chairman of the country’ third-largest iron-ore producer Fortescue Metals Group Ltd., this month banded together with rivals including U.S.-based Cliffs Natural Resources Inc. and Australian producer BC Iron Ltd. to push for an inquiry, kick-starting a campaign he branded “Our Iron Ore.”
BHP and Rio, have meanwhile argued that iron ore is a commodity traded globally in a free market and say their expansions, planned years ago, are in the best interests of their shareholders.
They have also previously argued producers in other countries would simply start up new supply if Rio or BHP held back on expanding production, meaning Australia would lose out.
To be sure, their strategy of increasing supply even after such a sharp fall in prices has its critics within the industry. Citigroup analysts this week said the pair are now generating their lowest level of returns since the 1980s.
BHP and other business leaders this week cautioned that the escalating controversy over iron ore in Australia could damage relations with the country’s major trading partners, and drive investment to other iron-ore rich countries.
China’s Premier Li Keqiang last week signed several financing and trade deals on a visit to Brazil, including some that could benefit Brazil’s state-owned mining giant Vale S.A.
But Fortescue’s Mr. Forrest said the government’s decision to block the probe was a sign of the government’s powerlessness against the likes of BHP and Rio.
“It appears the intense lobbying and wishes of the multinational mining giants has prevented a formal inquiry into the iron ore industry,” he said.
Still, with Australia’s next general election expected to be less than 18 months away, it’s likely the iron ore issue will remain prominent.
“Next election, however it goes, will probably be on a knife edge, and the government is scared of being caught behind the curve,” said Michael Rafferty, an economist at The University of Sydney. “If unemployment keeps edging upwards, you could imagine easily and right-wing populist movement saying: ‘We have been ripped off and we need to do something about it’.”
