Barnett abandons Twiggy inquiry

From The West Australian:

Colin Barnett has revealed Federal Treasurer Joe Hockey telephoned him about the prospect of a parliamentary inquiry into the iron ore industry last week and the Premier told him he “didn’t think it was a good idea”.

…“I’ve said right from the outset that I believe the approach taken by the big iron ore miners … was a flawed business strategy – I still believe that but I equally have said that I don’t think any good can come out of a federal parliamentary inquiry,” Mr Barnett said this morning.

“If there is any evidence of anti-competitive behaviour that should be referred to the Australian Competition and Consumer Commission.

“If it’s not anti-competitive, the only other thing that could be done would be to impose restrictions on exports. That’s not in the interests of the iron ore industry, of Australia or WA.

“(An inquiry) would send the wrong message. I don’t think it would cause great damage but it could go off in any direction.”

Yep, and so it will, with today’s pet shop display an excellent example. Maybe the good Comrade should have thought of that before pumping the issue for all it is worth. And from the credulous Nick Xenophon:

“Any assertion that an inquiry into a sector, such as the iron ore sector, will do damage to our reputation with trading partners is verging on hysterical,”Independent Nick Xenophon said on Sky Business News this afternoon.

Err…no…the inquiry is the hysteria.

 

David Llewellyn-Smith
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Comments

  1. Further into that article we find this
    “Mr Barnett’s comments are a significant departure from remarks last month that he as Premier could pull “levers” to pressure iron ore multinationals not to expand their mines if they continued to flood markets.
    ““They need my approval to expand output, ” he said on April 18.”

    Comrade you signing the previous expansions is what lead you here. Your belief in future boom forever is the key causative agent.

    Comrade is there any sensible review on your BS royalty deal with BCI?

  2. Guys, here is probably the key, “(An inquiry) would send the wrong message. I don’t think it would cause great damage but it could go off in any direction.”
    That mob in WA are up to so much scallywagging, that skeletons will be running for closets or abandoned mine shafts, left right and centre. WW

    • moderate mouse

      Bingo! He’s shitting himself that kick-backs will get mentioned. Please, I for one REALLY hope this inquiry goes ahead now. Just imagine all the fat envelopes hidden inside newspapers that changed hands over the last five years to ‘facilitate’ approval processes. Any review would have to question recent approval processes…Colin is realising he can’t have his cake and eat it too. Twiggy will be calling it off next……let it rip!

      • Double Bingo!

        A proper Iron Ore Inquiry should never be about Twiggy and his ‘needs’ nor Comrade Colin for that matter. It should be about one thing – the national interest and the appalling prospect that Australia is going to allow a lot of miners who made dud CAPEX decisions to flood the market with “our ore” in the desperate hope of retrieving some value for their shareholders and foreign bond holders.

        Sad that the understandable antagonism by many towards Twiggy is blinding them to the urgent need for a thorough inquiry into the policy failures of both major parties over the last 10 years in relation to Iron Ore.

        Could someone please wake up the Greens – this issue should be right up their alley.

  3. Comrade Colin may have been misquoted – I think he meant to say

    “If it’s not anti-competitive, the only other thing that could be done would be to impose restrictions on exports. National restrictions on export volumes are not in the interests of a lot very large mining companies who are prepared to flood the market with Australian Ore to lessen the pain for shareholders and bondholders who paid for a bunch of dud CAPEX that should already be in mothballs”

  4. Colon got his GST payoff, road funding and a new medical school. His temperamental attitude has moderated in line with his paymasters. Plus i think its obvious to him he wont get a seat on the board of a mining company after leaving politics if he keeps his rants up.

    • As Abbott backs away while BHP and RIO bleat more stridently and Comrade Colin realises there is a risk that an Iron Ore Inquiry might poke around more than a few murky holes, perhaps a few more people might start to understand why a Proper Inquiry into Iron Ore was vital.

      Though Twiggy wanted an inquiry, the Inquiry that was needed would have not have had his (or other juniors) interests at the top of its agenda. Instead of grabbing Twiggy’s misplaced enthusiasm and getting the Inquiry up before anyone thought it through – many simply wanted to poke a twig into Twiggy (and any other operator of a junior mine) by decrying whatever twiggy wanted.

      Well now the penny seems to have dropped at Big Mining mission control and there will be no more talk of Inquiries into the conduct of the Iron Ore industry. (“Copy Canberra? Copy Canberra?”)

      Yes, looks like we will be left with no Inquiry and a mining industry cutting each others throats with OUR ORE to satisfy their foreign owners and bond holders panicking about a lot of dud CAPEX.

      The Road Runner of corporate and finance interest escapes, yet again, with a Beep Beep.

      • Even StevenMEMBER

        PFH – Are you saying that given IO is non-renewable resource we should constrain output until a time in the future (possibly a long time in the future) that the price recovers? In this way, we maximise long term royalties/taxes to Australia?

        If so, I’m not sure your logic holds. even if BHP & RIO were juicing output (driving prices lower) in order to run out Fortescue et al. This will force Fortescue to close (thus reducing rate of resource extraction). Am I missing something in your proposal? Is it the composition of foreign vs. Domestic shareholders?

      • Even,

        You need to read all my comments on the earlier thread – the one with dills in the title.

        http://www.macrobusiness.com.au/2015/05/welcome-iron-ore-inquiry-lies-dills-ignorance/#comment-1332643

        My point is that our miners are a primary factor driving the price down and already there is little foreign competition that can match the current prices.

        So my question is why drive the price down further with over supply of our ore simply because our miners need to justify dud CAPEX decisions.

        The only efficient way of stopping them is capping export volumes.

      • Pfh,

        HnH has explained the big IO strategy previously and it tottally makes sense. In that context, an enquiry is a pointless waste of money.

        There is no conspiracy – what they are doing makes sense – entirely.

        If you are worried about corruption – back an ICAC in all jurisdictions all the time …

      • Even StevenMEMBER

        Ok. I understand what you are saying. But I’m not sure how you can be so sure of what you’re saying. At most, I can allow you *might* be right. The results of any intervention are complex.

        By expanding output, Australia obtains greater market share. Potentially by forcing prices to a point at which even foreign country subsidisation of foreign IO miners becomes unpalatable. I would think that is an acceptable end game from Australia’s perspective.

        The results will depend upon sensitivities of demand, supply, financial support for marginal producers, subsidies, the pricing influence of Australian producers and a good measure of game theory.

        However, your proposal makes me think that perhaps an Inquiry is not definitively a waste of time.

      • Even StevenMEMBER

        Also, the suggestion that the big miners increase output simply to justify ‘dud capex decisions’ is likely inaccurate. They know the concept of sunk costs. They will produce at a level that they believe maximises their (individual) profitability. This includes mothballing mines where needed. But if they think they can expand market share higher output in short term is a viable strategy. This is the scenario I believe HnH has outlined.

        I’m just not confident an Inquiry will achieve a markedly superior result than BHP/RIO’s own shenanigans.

      • @Even Steven,

        Game theory is rubbish wrt complex human activity’s playing out in a dynamic enviroment, that some are still using that bit of kit as optics when observing and formulating a thesis has a lot to do with our currant predicament.

        Skippy…. philosophy pretending to be social psychology from a atomized perspective w/ reasoning from a “self interest” perspective dressed up as logic i.e. humans are not logical most the time…. groan….

      • HRHolden,

        i have made no suggestion of conspiracy. BHP and RIO are doing exactly what is in their shareholders and bond holders interests.

        The problem that most of you are overlooking is that there is a distinction between their interest and the national interest when, having regard to the cost of production and volume capacity of foreign competition, Australia ore needs only beat that foreign competition and not other Australian producers.

        The only reason the price of ore will approach the marginal cost of the lowest cost Australan ore is if we allow Australian miners to compete against each other unecessarily.

        The only way to stop that in a relative efficient and transparent manner is to limit national export volumes. Note: this does not involve directly setting a price but the National volume will be set at a level that takes a few things into account – the international demand for ore, the cost structure of foreign competition and their production capacity, plus also concerns re unbalanced economic development in Australia. Sometimes gorging on a good thing is not in the national interest.

        Getting the volume cap 100% right is not essential as if the resulting international prices are too high – i.e. allow foreign producers to get excited – we just raise the national cap slightly.

        Likewise if demand falls and the price gets too soft some of the cap can be withdrawn.

        The miners bid for a slice of the cap and they can then sell that ore at whatever price they choose.

        People seem to have this weird belief that the iron ore market is some sort of perfect efficient commodity market even though China are happily creating a massive glut by maintaining extremely inefficient mines in operation producing large volumes of ore at high cost.

        The sensible response by Australia is to supply the market with as much ore as the market wants at a price just lower than Australia’s foreign competition.

        From the perspective of BHP and RIO other Australian miners are the real competition.

        That is the difference between the national interest and their private interests.

        The only serious objections that have been raised to date seem to be sheer horror that the government might interfere in a market in the national rather than private interests

      • @Pfh007,

        “i have made no suggestion of conspiracy. BHP and RIO are doing exactly what is in their shareholders and bond holders interests.”

        I have to disagree with this statement as Shareholders and Bond holders are not high up on any Corporations constitution, profit is the numoro uno, shareholders [equity] are residual claims, of which bondholders are senior and neither has any rights to assets until all other senior agents are lawfully satisfied.

        The Myth of Maximizing Shareholder Value
        Posted on January 24, 2014 by Yves Smith

        “Yves here. This is a subject near and dear to my heart. So many of the assertions made about “maximizing shareholder value” are false that they should be assumed to be a lie until proven otherwise. The first is that board and managements are somehow obligated to “maximize shareholder value” is patently false. Legally, shareholders’ equity is a residual claim, inferior to all other obligations. Boards and management are required to satisfy all of the company’s commitments, which include payments to vendors (including employees), satisfying product warranties, paying various creditors, paying taxes, and meeting various regulatory requirements (including workplace and product safety rules and environmental regulations). As we wrote last year:

        If you review any of the numerous guides prepared for directors of corporations prepared by law firms and other experts, you won’t find a stipulation for them to maximize shareholder value on the list of things they are supposed to do. It’s not a legal requirement. And there is a good reason for that.

        Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation. From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation, not to shareholders in particular…Shareholders are at the very back of the line. They get their piece only after everyone else is satisfied. If you read between the lines of the duties of directors and officers, the implicit “don’t go bankrupt” duty clearly trumps concerns about shareholders…

        So how did this “the last shall come first” thinking become established? You can blame it all on economists, specifically Harvard Business School’s Michael Jensen. In other words, this idea did not come out of legal analysis, changes in regulation, or court decisions. It was simply an academic theory that went mainstream. And to add insult to injury, the version of the Jensen formula that became popular was its worst possible embodiment.

        And as John Kay has stressed, when companies try to “maximize shareholder value,” they don’t succeed:

        Oblique approaches are most effective in difficult terrain, or where outcomes depend on interactions with other people. Obliquity is the idea that goals are often best achieved when pursued indirectly.

        Obliquity is characteristic of systems that are complex, imperfectly understood, and change their nature as we engage with them…

        Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations…in each case: the company that put more emphasis on profit in its declaration of objectives was the less profitable in its financial statements.

        So what is this propagandizing really about? As this post from INET discusses, it’s a justification for extractive capitalism. I encourage you to make the time to watch the video, which is very accessible and lends itself to sharing with friends and colleagues.”

        http://www.nakedcapitalism.com/2014/01/myth-maximizing-shareholder-value.html

        In addition –

        CORPORATE MALFEASANCE AND THE MYTH OF SHAREHOLDER VALUE

        http://scholar.harvard.edu/files/dobbin/files/2005_ppst_corpmal_zorn_0.pdf

        Skippy…. It should be noted that Jensen eventually walked back his Crammer-esque meme, but not until the damage was done i.e. spreading falsehoods which amount to getting legal advice from a latrine lawyer e.g. sounds great, but good luck in court with that opinion.

      • Skippy,

        Good point – though my statement was only intended a response to the suggestion that I was alleging a conspiracy between RIO and BHP.

        Even and HRHolden

        A simple example makes the point.

        Assume international demand is 1000 units and foreign capacity is 500 units at a production cost of $50. Australia can produce unlimited units at a cost $25 per unit. Australia could decide to sell only 500 units at $50 and leave the Foreign produces to the remaining 500 units at $50. In this scenario Australia makes $25,000.

        If Australia wanted to it could offer buyers 1000 units at $49 – though only a dollar discount most if not all buyers will take it and Australia earns 1000 * $49 = $49,000 instead of $25,000

        But lets say instead of Australia we are talking about two large mining companies both of whom are permitted to export as much ore as they liike.

        When one decides to drop the price to $49 to steal business from the other ‘Aussie’ firm and the foreign countries, the foreigner can do nothing but the other Austraian company can cut their price to $49.

        The first company retaliates and the process continues until Australia has sold 1000 units at close to $25. Total income from the sale of 1000 units of Australian Ore is only $25,000.

        Instead of that lets say we impose a national cap on export volumes of 1000 units and invite company A and Company B to bid for the right to export that Iron Ore in 100 unit lots.

        How much will each be willing to pay for the right?

        Something pretty close to $25 per unit because their cost of production is $25 and the foreign competition cannot go lower than $50. Lets say $24.

        The Australia govt says thank you fellas for the $24,000 you just paid for the export volumes licences and the miners then go off and sell their licences volume into the world market at $49 per unit ($25 + 24).

      • @Pfh007,

        Late reply sorry.

        The reason I pointed out the share holder meme was your use as an indicator of RIO and BHP charter and what that boiled down too, and how that frames the topic at hand e.g. way to altruistic.

        I would also note that most of the machinations are about market share and exchange performance, unit price is just a tool to achieve desired results wrt those two factors. Largely as a result of the last few decades of executive and board rooms writing their own ticket through so called performance metrics and the remuneration that affords them. Shareholders be damned….

        Skippy…. As far as Twiggy goes I would proffer hes just provincial bear fat, a middling player allowed to exist during the good times [gives a modicum of validity to the free market narrative] only to be consumed in the lean. His greatest mistake was thinking he was a made man on equal footing with his betters, tho a step up from Clive.

      • Pfh,

        Your hypothetical assumes we’re a price setter does it not?

        And the reality is closer – Vale, Kumba etc are noit much higher on the price curve and they would just take the volume we didn’t supply.

        The price would only rise marginally.

        Not that I know how to model this stuff …

        Oh and there are the unintended consequences and the foreseen outcomes ..

      • Even StevenMEMBER

        Good example, PFH. but is it not a viable strategy to drive prices lower – remove the competition – let’s say subsidised Chinese IO producers, increase market share, and then improve pricing power later?

        Your example assumes Australian IO miners will compete intensively against one another, and assumes there is no form of dialog (collusion) at all. I find that unlikely.

        Could well be that BHP and RIO are colluding to knock Fortescue out (or take it over), and resume normal pricing. I expect this would have much the same effect as your proposed quota system (with some adjustments to royalties perhaps).

        In short, I can’t see that our market-based system is so broken that an Inquiry is necessary. But given the size/importance of IO to Australia, I’m not as quick to dismiss the idea as I was previously.

      • HRholden,

        “Unintended consequences and the foreseen outcomes”… really?

        Whilst were at it why not just espouse esoteric homily’s about what happens when men try to play gawd… its basically the same drivel….

        skippy…. suffice to say neither BHP or RIO give a rats ass about anything other than the C -Suite making a packet for themselves and pleasing some very serious people.

      • Skippy,

        Yes – I have no problem with your elucidation of that point – to the extent my comment may have suggested or implied any altruism on the part of BHP or RIO that was unintended.

        Even Steven,

        I think you are overlooking that the miners have to bid for the export volume allotments which means that RIO and BHP will be forced to bid against Twiggy, Gina and anyone else (i.e non-miners) who thinks they would like to export iron ore or buy the right to do so (so they can re-sell that right to someone else). Allowing speculators in will help minimize the potential collusion by miners in the auction.

        The proceeds of that auction go to the public. The miners having paid for the export allotment will remain highly motivated to be efficient producers as the sale price will be cost of production + export licence fee.

        If they then want to sell at a loss for market share they can do so but not at a cost to the public as they have already paid for the export licence allotment.

        What they bid for the export licence will be their commercial judgment of what is the highest price they can sell the ore for and that is going to be $1 dollar less than the highest non-Australian competitor who can supply the capacity required by the market. If they don’t believe they can undercut the foreign competition by $1 they (and no one else will bid a penny for the allotments)

        As I noted above the current national production is 720M tonnes out of an international market of 1.3B tonnes. I am suggesting that considering the price is still reasonable a good starting point for the cap would be 700M tonnes.