Andrew "Twiggy" Forrest's call for a production cap to be set in place for the world's largest miners caught the market's attention on Wednesday, as well as that of the Australian Competition and Consumer Commission.
Forrest, who is the Chairman of the world's fourth largest iron ore miner, Fortescue Metals Group Limited (ASX: FMG), stated that the big miners should "act like grown ups", as quoted by the ABC. He also added: "All of us should cap our production now and we'll find the iron ore price will go straight back up to $70, $80, $90."
Indeed, by restricting the amount of ore that could hit the market, the commodity's price would rebound strongly, not only benefiting the nation's miners – both big and small – but also governments around Australia. At the same time however, such an arrangement would also breach the principles of a free-market, while Rod Sims, Chairman of the ACCC, labelled it as cartel-like behaviour.
As quoted by the Fairfax press, Sims said: "Cartel arrangements cover price fixing, market sharing, bid rigging and output restrictions. Also under the act, it is a breach to attempt to set up those collusive arrangements. The issue is whether or not we judge this is an attempt to enter into a collusive arrangement." The ACCC will continue to pursue those concerns.
Forrest's comments come at a time when iron ore is hovering near a seven-year low at US$55.81 a tonne, according to the Metal Bulletin. Chinese demand for the commodity is slowing rapidly while BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Brazil's Vale continue to increase their output, flooding the market's supply. Each of these companies have confirmed that they will continue to boost their production rates in an effort to increase economies of scale, while it will also force the world's high-cost miners from the market.
Forrest's comments could also be considered as a sign of desperation. Fortescue, which UBS estimates suggest has a US$57 per tonne breakeven level, recently abandoned a US$2.5 billion bond issue, citing "volatility in the US credit markets". This after it failed to raise debt in an attractive term loan. The market is concerned about Fortescue's ability to repay its debts, making the miner a risky play for investors.
