From Sam Walsh via the AFR:
“I’m not sure where Colin is coming from, given that we have been very clear in our plans and our expansions are approved by government,” Mr Walsh said in Sydney.
“It is a cyclical industry, we shouldn’t panic when there is a blip in iron ore pricing. The fundamentals are still very strong for the industry. Colin shouldn’t worry, there will be demand for the product,” he said.
…Mr Barnett later clarified he was critiquing the strategy which both companies had adopted, and he said he was not implying the companies were working together.
“I’m not suggesting the companies are dealing with each other, so if I created that impression, I regret that,” he said.
No, Mr Barnett, you are openly criticising them for not colluding. This is hubris.
RIO is right but prices will still crash. Even so, what else is it to do? The answers for all miners lie back in time when they committed huge sums of capital to expansions. Cut back now and their returns on equity plunge. This is the age-old truth of the commodity cycle that Australia’s elite forgot.
Lowest marginal cost of production wins.
One chap at the AFR seems to understand, Angus Taylor, Federal member for Hume:
Game theory can shed light on such a game of chicken. First, the player with the lowest costs typically captures more of the market, as the French mathematician Antoine Cournot demonstrated in 1838.
…Second, signalling your intention to “lock the steering wheel” will cause your competitors to “swerve” (in this context, halt or slow expansions).
…Third, the biggest producer, Vale – which has the most to lose – has blinked. No wonder Vale’s director of planning has said “everyone is nervous about the iron ore price”.
Finally, secretly preparing to “swerve” (that is, to reduce production and expansions) at the last moment is typically smart for large players, so long as this really is a secret. But that requires flexibility far greater than Australia’s current regulatory regime permits.
…We clearly need to stop jawboning Rio Tinto and BHP Billiton to halt their expansions…We need to ensure that our producers are able to get their operational and expansion costs down.
Correct, though Vale hasn’t blinked and it is Fortescue that has the most to lose.
