To some investors, it might not make sense why the country's biggest miners would be ramping up the iron ore production rates. After all, the commodity's price is already down more than 38% this year and it is widely anticipated that there is more pain in store.
However, there are actually a number of logical reasons why miners like BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) would want to raise production. Here are three of those reasons…
- Economies of Scale. The benefits of higher volumes and lower costs should at least partially offset the effects of the tumbling commodity price on their margins.
- Competition. The world's smaller miners are unable to cope with the lower iron ore prices with many being forced out of the market, thus reducing competition in the sector (and deterring others from entering). Already we have seen a number of Chinese mines close while some of Australia's junior miners have also been forced out of business.
- Dictating Prices. Some market forecasters also believe the bigger miners are attempting to gain so much control over the market that they'll be able to dictate prices in the future. Although I see this as unlikely, it is a possibility as smaller miners are gradually forced from the market.
