Twiggy crowns himself Banana Republic king

At the Daily Telegraph today, Andrew Forrest crowns himself Banana Republic king:

Let me outline the impact of plummeting iron ore prices. For every $1 fall in the price of iron ore the Australian economy loses $800 million in foreign income and the Federal Budget takes a $300 million hit to company tax — that is the public’s money. In other words, your money.

…Tens of thousands of direct jobs have been lost and mines have shut down in South Australia, the Northern Territory and Western Australia, and many more lost indirectly. All those who relied on a healthy iron ore industry have felt the threat or succumbed to it.

However, what is really galling is that the price has fallen off a cliff not just because of international forces beyond our control but because of the words and actions of companies, particularly London-based multinationals, who mine and export our iron ore.

…Australians own the iron ore. That’s why the companies which mine it have signed contracts with the State of WA undertaking to maximise its price when they sell it.

Are the two biggest multinationals, Rio Tinto and BHP Billiton, doing that? Or has their oversupply done nothing more than actually force the price down and threaten the economy of our country? And all for what?

…If you are angry about being gamed like this, the good news is you have power as owners of this resource to ensure miners maximise iron ore value and help repair the economy. It is called a social license to operate. And it is provided by you to the companies you trust to develop your natural resources.

…So stand up. Support brave politicians who speak up to demand companies act maturely, as our Federal Treasurer Joe Hockey, WA Premier Colin Barnett, Foreign Minister Julie Bishop and Leader of the Opposition Bill Shorten have done already.

Write, email or ring your local Parliamentary Member. Be clear in your views.

You really have to live through these rent-seeking episodes to understand just how deep is the contempt for the Australian people among our elite miners. This is concentrated Banana Republic clap trap, urging the people of an island commodity nation in their own name to act contrary to their own interests for the benefit of one man.

Vale does a good job of exposing Twiggy’s rhetoric today at the FT:

In an interview Luciano Siani, chief financial officer…said Vale would be likely to “push to the fullest” its production of the highest grade of iron ore, which commands a premium price from steelmakers. By contrast Vale would be more likely to “manage” its more “standard” iron ore supplies, he said.

“Maybe we will have several stories unfolding [in the iron ore market],” Mr Siani said. “We believe that the products will behave differently according to the segment.”

…Among Vale’s rivals, Australia’s Fortescue Metals Group is most reliant on lower-grade ore. Many smaller companies also depend more on lower grades.

“We are seeing . . . the early days of a segmentation in the market,” Mr Siani told the Financial Times. “We have a lot of oversupply of more standard ore . . .”

Which is why this happened:

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RIO and BHP produce high quality ore as well.

I can only repeat the following in the hope that some of my countryman see through Mr Forrest’s epic assault upon their good sense.

Owing to geographic concentration, the benefits of scale and capital intensity, iron ore extraction is a natural oligopoly business. What’s at stake here is not whether prices can be artificially propped up but who owns the cartel and whether that benefits Australian welfare. Let’s take a quick look at two scenarios to make the point.

The first scenario is the cartel structure favoured by Andrew Forrest and various pollies that seeks to protect and include iron ore juniors by pulling back major miner supply expansions. The second is also a cartel but one that results from swift junior rationalisation enabling the major miners to consolidate their pricing power.

In the junior cartel, Australian iron ore produces 837 million tonnes (mt) of iron ore from 2016 onwards. It does so at a slightly improved price for 2016 as oversupply is reduced in the short term by 43 mt as majors retrench.

However, as Sino, Roy Hill, Anglo and Vale continue their expansions and Chinese demand keeps falling, the glut builds from 2017 onwards and the price keeps falling.

In due course, smaller members of the junior cartel require enormous subsidy to stay afloat as they register huge losses year after year in a price environment stuck at $20 and below. It’s either that or the cartel must negotiate spectacularly implausible shared volume cuts across all Australian producers (at least those in the cartel).

Trade rules must be junked, Chinese relations destroyed and the WTO as well as ACCC told to piss off. To operate this would require a virtual nationalisation of all players as total transparency governs quotas, otherwise widespread cheating is inevitable, as in OPEC.

In the alternative model, the major cartel, Australian iron produces 880mt in 2016. It does so at an average $10 lower than the junior cartel in that year given the higher supply glut. However, as the 50mt of junior and 165mt of Fortescue production shuts down by 2017 the iron ore price at first stabilises and then slowly rebounds as some pricing power returns to the major producer’s cartel. Iron ore volumes are down to 715mt but the price is trading at $40 per tonne in a rough market balance.

Juxtaposing these two scenarios gives you the following total revenue chart for the sector (and nation):

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Most importantly, in the junior cartel there are no profits for anyone as protected oversupply crushes all margins, including those of the majors. There is also a gigantic Budget drain for WA as it supports the juniors with huge subsidies that completely overwhelm royalties.

In the major cartel, unprofitable iron ore is driven out and solid profits return to the low cost producers as Roy Hill emerges as the marginal producer around $40. There is no budget drain and solid royalties, as well as a Federal tax take (if much lower than the past).

When you cut through all of the crap it’s really very simple, the juniors and Fortescue must die as soon as possible for the good of the nation. It is the only viable fix for the historic iron ore glut.

Comments

  1. Why on earth is there this pervasive mentality of “We made bad business decisions, bail us out, please” in corporate circles?

  2. Should we look at alternative revenue raising models to get a better deal for the Australian people?

    Profit off shoring and other techniques could be made redundant if the primary source of revenue is a ‘Royalty’.

    Forget tax and charge greater royalty.

    • That’s right tonydd,

      Higher royalties during the boom was always the best and simplest way of securing the taypayers share of boom time prices.

      Sadly, those greedy federalists in the ALP decided a complicated Canberra grab for cash was what they would do – instead of encouraging the states to adopt a higher royalty structure.

      That strategy allowed the mining industry a defensive strategy that was readily made partisan.

      The stupid bit of course was that eventually the states raised royalties a bit anyway.

      If an Australian-Brazil co-operative to ‘manage’ the market is not possible, due to ideological blinkers in Canberra, then the only response is to get the states to fix royalties at the highest rate possible before miners threats to leave should be taken seriously.

      Still none of this will be much comfort to Twiggy who without special treatment willstruggle to survive. What is important is that the liquidation of juniors does not become an opportunity for our trade competitors to gain even more control over our national assets.

      Not holding my breath.

  3. If anyone needed a clever plan to ruin an economy, then that using a falling interest rate structure would be perfect.
    It allows the marginal company(Fortescue Metals) to survive and add surplus production to a market that is already oversupplied.
    Zero and negative interest rates fuel deflation and price destruction everywhere.
    It is the nail in the coffin of the economic and monetary system.
    Anyone with a gift for wisdom would not seek the answer there, and yet every country has followed Japan into this burrow, despite seeing its demise in doing so.

    • Ath. Either they devalue by printing or by stemming capital inflows. The latter would require admitting that the SS Australia is taking in water (commodities) and that the bilge pumps are not working. Of course this would not just lower the dollar but crush RE and their main voting block; a decade out in the wilderness for them; and their own portfolios destroyed. they’d rather sink it and blame it on the crew. And that is why instead of a general devaluation (everybody pays) they like economic immigration (lower income households pay).

      • Hi Jace,
        Wherever you look it is a complete dog’s breakfast.
        At a personal level we have to remember that Noah built the Ark BEFORE the rain…this requires the safety of the smaller regional banks as each of the big-4 are only covered by the Government Guarantee to $20Billion.This is probably due to the fact that they are very large hedge funds, no longer banks…the taxpayer should not have to bail them out.

  4. Hang on Mr Forrest. You’re saying that I, as a proud Australian, own the ore? And these nasty foreign owned companies are acting contrary to Straya’s interest! That’s outrageous. The only fair answer is to nationalise the entire iron ore industry. Since you, Mr Forrest, are so deeply concerned with the national interest, we can start with Fortescue. Pop the keys in an envelope and mail them to Scott Morrison, C/- Parliament House, Canberra.
    /s

    • Can I just say, that Andrew Forrest is a good man. I used to help run an aboriginal children’s camp annually for a number for a number of years – and many of the facilities were given by Forrest during his Anaconda days. It was a Aboriginal farm near Lenora, whereby the Aboriginal Corporation tried to rehabilitate alcoholics, etc – and establish a working profitable enterprise In fact, so reliant were they on Forrest good nature to establish this facility (not much government help – despite what people think), that despite generous supplies from Forrest in the past (from then ex-construction camp), when approached if he could supply a kitchen (I don’t think they realised how bad things were corporately at Anaconda), were immensely surprised at the rant they received. I cannot remember what the purported reply from Andrew was, but it was along the lines that did they want the shirt of his back too…

      Forrest has done great things in the past – yes he has been a bad boy – I also know some very personal stories from his broking days as well. But let us not forget, that despite countless projects globally, Forrest put his money where his mouth was – and he is the only person/company that made a success of creating an enormous new iron ore company, utilising a completely new and unique mining method – from scratch!!!! And he did this, despite the Chinese thinking they had out-foxed him (and yes I talked to a Chinese investor, who knew the key mining executive who was gloating about it), court battles – he built the worlds forth largest iron ore miner – from scratch, and ultimately employed tens of thousands.

      Contrast that with another un-named mining “barron” – who is surrounded by sycophants, scorns anyone earning more than two dollars a day – and is able to down <20 G&T's in a single flight from Perth to Singapore…

      This coming crash will destroy good and bad alike. But the key point is they are not all alike…

      • “(I don’t think they realised how bad things were corporately at Anaconda)” Well the last lot of bond holders certainly didn’t! And isn’t it interesting, perhaps deja vu, that a similar restructuring of Fortescue bond holding appears to have just gone through…

      • He is doing what he has always done – fighting to save his creation. If you were in his shoes you would do the same.

        Whilst I agree with what your final conclusion how this is ultimately going to play out – make no mistake he will make Rio and BHP pay very, very dearly. As I have mentioned before, there are at least six floors in BHP’s head office that will disappear before this is over, and similar numbers at Rio too… and in all that time, expect Andrew to rage and rage…

        It is a sad story of a man who has done great things… our favourite moral story, of a man reborn, keen to recompense for earlier mistakes, succeed, tries to break Aboriginal issues – to see it slowly disappear in front of him. That reborn story then becomes a Greek Tragedy. That in his success, mere mortals are promoted into the pantheon of demigods, but the success contains the flaw to their demise. And as the play continues – we watch in horror as history transpires and the fall from grace becomes complete.

        Don’t denigrate the man to trying to save what is unsaveable. He will never get this opportunity again – and he knows it.

      • RT: I wouldn’t describe it as melodramatically as you have but you do have a point. His behaviour is human – irrational, emotional and ultimately futile. There is a lot of sympathy for the man (as flawed as he is) and probably an equally irrational desire for him to make it, even when we all know it is over. Having said that I do hope that he draws some blood from BHP and Rio. a pyrrhic victory no doubt but one has to satisfy our inner ape.

      • While most would agree, there is another side to the aboriginal story, RT. Have a look into the dispute over how to pay the original land owners, voting over such etc.

        I know a number of people who have worked for him and they’re not that complimentary.

      • I agree, I’ve no problem with Twiggy doing what he has to.

        Do not go gentle into that good night.
        Rage, rage against the dying of the light.

      • “I agree, I’ve no problem with Twiggy doing what he has to.”

        I’d expect no less from a soon-to-be former billionaire. Doesn’t mean we should all stand aside and cheer him on in all his selfish glory.


      • and is able to down <20 G&T's in a single flight from Perth to Singapore…

        Whoever that person is, they are as admirable Australian as David Boon. Whenever I figure out their identity, I will have a newfound respect for them. (btw 20 G&Ts at airline prices costs about as much as a Sydney 1 bedder. Good to see that there a rich folk who use their money to enjoy themselves, rather than, for example, wasting it on pointless litigation against members of their own family lke the descendants of Peter Wright)

  5. I’m definitely with RT in that I have enormous respect for what Twiggy tried to do. From day one this was a ballsy strategy, he could of decided to build a smallish company and simply pocket the profit while the going was good, instead he set out to build (from scratch) the fourth largest IO exporter in the world. Wow this guy has a pair.
    I personally spoke with many Chinese executives that believed Twiggy was just their puppy(or maybe puppet), well didn’t they get a surprise when he bit their hand.
    So at one level I’m reluctant to play any role in Twiggy’s downfall but then I look at the way the cards are stacked and conclude I’d be a fool not to play the hand I’ve been dealt, from previous discussions with those close to him, I’m told that Twiggy would be the first to say “you play the hand you’re dealt” when these rants are are only option that’s left, he naturally plays the illogical rant card….what is it they used to say,…. if you can’t blind them with Science than baffle them with BS.

  6. SupernovaMEMBER

    What am I missing????: Arn’t iron-ore royalty payments to the States already linked to production? So if RIO and BHP want to oversupply the iron ore market they pay much higher royalties to WA.