Business/Robbery etc: Joe Hockey’s ore-inspiring budget

With the state of the 2015-16 budget (and prospects of years of continuing deficits) heavily dependent on what the Treasury guesses will happen to the price of Australia’s biggest single export, iron ore, its sudden 22 per cent recovery to almost US$58 a tonne may have eased some of Joe Hockey’s pre-budget tension.

But there are questions about the sustainability of this bounce which was sparked by what may be an over-enthusiastic interpretation of BHP’s decision not to proceed with a port improvement project, Rio’s shipments slowing due to a cyclone, and Brazil’s Vale considering shutting down some old high cost mines as it rapidly expands – but leaving unchanged the fundamental imbalance between supply and demand.

The Treasurer has been playing a difficult game (for a believer in free markets) of trying to jawbone Australian iron ore producers into behaving in a way that would ease his mounting budgetary problems.

He needs a big rise in the export price, but that is unlikely without an unexpected recovery in Chinese demand ( as China’s future economy is not expected to be so steel intensive) or an unlikely substantial reduction in the planned iron ore production rises that are already flooding the market.

Welcome as it may have been, this temporary pre-budget price recovery will not solve Joe Hockey’s iron ore problems, with leading finance houses like Goldman Sachs forecasting only US$40 a tonne for years to come.

No wonder Joe Hockey is worried, with a possible hit to revenue of $30 billion and his department contemplating the chance of iron ore dropping to US$35 a tonne (from US$135 early last year) in a market that ‘seems to have no floor’.

So when Fortescue Metals Group’s ‘Twiggy’ Forrest recently unwisely called for Australia’s big three (Rio, BHP, and him) to agree to curb production to push up prices, Joe Hockey added some moral suasion to this illegal call for a cartel by questioning the tactics of BHP and Rio in continuing their major expansion of production in an oversupplied world market – mainly China.

His justification for this intervention was that ‘Obviously the price of iron ore is going to have an impact on our budget and we expect our producers to behave collectively in a mature fashion’.

But ‘mature behaviour’ is in the eye of the beholder – as is Australia’s best interest.

It may well be in Australia’s best long-term interests to protect its market share against major overseas rivals like Brazil (where Vale is on a massive development program) by continuing with productivity-oriented expansion even at the cost of losing some of its relatively high cost local competitors – along with many foreign ones.

The over-simplistic crux of Twiggy’s hyperbolic attack on Rio and BHP is that their trashing of the market by over-producing is damaging Australia for no good reason because iron ore demand is ‘inelastic’ and will not increase in response to lower prices.

But as Rio has repeatedly pointed out, if Australia’s big miners don’t go ahead with their expansion plans (and Gina Rinehart is soon to add to the oversupply in a big way), overseas miners that do so will stand to benefit at our expense when demand eventually picks up.

‘Twiggy’ Forrest hasn’t twigged (and neither has Joe Hockey) that, despite the latest price recovery and modest easing of production increases, you can’t fix a depressed iron ore market by populist public haranguing of the big producers(‘muscled multinationals who don’t care about Australia).

And he also has not learned that being a good corporate citizen, with a favourable image in Canberra and mates in the media, gives him no special capacity to dictate that competitors should put his interests (and therefore, of course in his view, Australia’s) above their own.

Nor does it protect him from being admonished by the ACCC (when deciding not to prosecute) that ‘Public Statements calling for competitors to agree to limit production or to raise prices may constitute a serious cartel offence’.

As the Australian Financial Review editorialised, ‘By invoking the national interest, Mr Forrest is indirectly calling for governments to step in….But the record of governments trying to rig commodity markets is disastrous’.

This is not a path a Liberal Treasurer should tread.

 

This article appears courtesy of Michael Baume. It originally appeared in full The Spectator Australia (9 May edition)

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