Fortescue Metals Group Limited (ASX: FMG) chairman Andrew Forrest has taken on something of an 'elder statesman' role in the iron ore industry of late.
In addition to contributing to the ongoing operation of Fortescue, he has been rallying support from the media, junior miners BC Iron Limited (ASX: BCI) and Atlas Iron Limited (ASX: AGO) and senior government figures in an effort to establish some sort of inquiry into Australia's iron ore sector.
Regular news watchers might have seen Federal Treasurer Joe Hockey talking about the potential for an iron ore inquiry during a lengthy day-time television interview yesterday.
While it's surprising to see that Mr Forrest's calls for an inquiry have reached the highest levels of parliament, I don't believe that any such inquiry will have a meaningful impact on the price of iron ore globally – or on the future of Australia's iron miners.
Rio Tinto Limited (ASX: RIO) CEO Andrew Harding's (quoted in Fairfax media) opinion was stronger:
'And the only alternative (to increasing production) I have is to form an illegal cartel, and I can guarantee that I am not going to do that.'
Andrew Mackenzie of BHP Billiton Limited (ASX: BHP) thinks it is 'a ridiculous waste of taxpayers' money on providing a basic economics course on supply and demand.'
No decision has yet been made on whether the inquiry that Joe Hockey and Prime Minister Tony Abbott have been talking about will go ahead. However judging by politicians' comments as quoted in Fairfax and elsewhere, the proposed inquiry will be investigating whether the iron ore market is run in a free and competitive manner.
The Australian Competition and Consumer Commission (ACCC) has already determined that it is.
Will an inquiry find any different?
I doubt it.
Will there be any sort of cap set on the price of iron ore or incentives made to help out miners?
I doubt it, and here's why:
- Australia is traditionally a free-market country, and Liberal governments typically promotes free enterprise
- Previous interference in the mining sector with the 'Mining Tax' helped sink the Labour government
- Government revenues are already struggling thanks to declining iron ore prices. It's hard to imagine royalties being reduced or handouts being made
- Colluding to control production and/or cap prices is illegal for companies, and still dubious when done by governments
Recent reports indicate Brazil's Vale SA is one of the other major contributors to a supply glut, with that miner previously indicating a target of 453 million tonnes of production by 2018, up from 340Mt in 2015. Vale has also indicated it may delay expansions to focus on reducing costs, but with a 33% increase in capacity coming, Rio and BHP could be right when they say 'if we don't sell it, somebody else will'.
Make sure you know the risks before you invest in one of the smaller miners without market power.
