More iron ore cartel clap trap

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The AFR back page gives Colin Barnett a lift today with a poorly reasoned rationale for Colin’s cartel:

Canada started operating the Canadian Potash Exporters cartel marketing firm 43 years ago to manage the world price of potash, the mineral used in fertiliser.

…BHP and Rio have rejected Barnett’s criticism of their corporate strategies to maximise production and lower costs, which boosts profit margins.

…Barnett, who is unfairly nicknamed the Emperor, has been reluctant to provide much detail of how he planned to cap iron ore production.

He could borrow the Canadian positioning on the Potash Corp takeover ban and use it in his battle to stop BHP and Rio flooding the market.

…One clear argument against capping production in WA’s iron ore-rich Pilbara region is that the global competitors will simply fill the gap in production. But that assumes the Brazilians are willing participants in the “flood-the-market strategy”.

The argument for capping iron ore should have happened five years ago, not today. Now it is too late. And Comrade Colin is powerless as the approvals are already in place. RIO, BHP, Vale, Sino, Anglo and Roy Hill have spent the capital and need a return. There is no “flood the market strategy” only a flooded market.

With Chinese peak steel behind us, and falling iron ore demand immediately ahead, the glut is so big that the only way for a cartel to work is for all major miners to be involved. In turn, that will boost the price to a level in which many juniors can survive (including in China), guaranteeing oversupply and enormous output cuts to everyone in the cartel via a quota system. In my view it’s unworkable across three nations (one of which is the customer) and seven miners.

The only cartel that makes any sense is the one being pursued by RIO and its destruction of higher cost production.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.