Barnett labels BHP and Rio’s iron ore strategy as “dumbest corporate plays”

WA Premier Colin Barnett has described a ramp up of iron ore production by Rio Tinto and BHP Billiton as “one of the dumbest corporate plays” he has ever seen.

The comments come after the price of iron ore dropped to a six-year low of $US54.50 a tonne.

This will leave a predicted $7 billion hole in the state budget over the four-year forward estimates.

Speaking on 720 ABC Perth, Barnett said the strategy being employed by the miners to push more product into a flooded market was “dramatically wrong”.

"The two big ones in Western Australia and the Brazilians have been putting too much iron ore into the market and they've precipitated a continuing downward trend in iron ore prices,” Barnett said.

"This has been one of the dumbest corporate plays I think I've ever seen.”

The pain being exacted by the depressed price of iron ore was on display again yesterday, with Karara Mining announced it will cut 15 per cent of its WA workforce, or 70 jobs.

Meanwhile junior miners such as Atlas Iron, BC Iron, Mount Gibson are all trading at multi-year lows and have been forced to make their own cuts to survive.

This is not the first time Barnett has hit out at the two majors for their part in the iron ore price crash.

In October he told them to “remember who you landlord is” while questioning their strategy of increasing iron ore supply into a sluggish market.

The comments soon became more heated, with the premier stating the business policy being employed by the companies was flawed and accused them of working “in concert”.

“They are employing a very similar policy, probably for their own reasons, but maybe the same reasons, which I think is damaging to the West Australian economy, to the iron ore industry, to the small iron ore producers and the people they employ,” Barnett said.

"Both companies are pushing record volumes of iron ore into the world market at a time when there is an oversupply in iron ore, lesser demand from China or a slow down in their growth and demand."

Barnett said the miners know too-well what their business strategy meant for other miners in the state with higher cost bases.

At the time, Rio boss Sam Walsh said Barnett shouldn’t complain about the company’s strategy to increase production seeing as the government signed off on the plan.

"I'm not sure where Colin is coming from in that given that we've been very clear in our plans and our expansions are approved by government," Walsh said.

At an iron ore conference in Perth last week, both Rio and BHP executives defended their iron ore strategies.

Rio’s iron ore boss Andrew Harding said unprofitable juniors needed to take responsibility for investing capital into unviable projects.

“I take no enjoyment out of the pain and suffering that higher cost procures may be suffering in this marketplace, but there’s a globally competitive market place and it is open to all the actions that take place by all the people in the market,” Harding said.

“As the price comes down, if you’ve made an investment with your own funds or with shareholder funds in a project that is not sustainable as the market price dips, that’s your responsibility.

“That is not anybody else’s ­responsibility.”

Harding also slammed recent suggestions that it should curtail its iron ore output in an attempt to usher in a price increase.

Describing the strategy as “economically nonsensical”, Harding said if Rio stopped producing tonnages, an operation somewhere in the world would be quick to fill the gap.

“If we don’t supply it, somebody else will,” Harding said.

BHP’s iron ore boss Jimmy Wilson also defended the company’s expansion plans.

Wilson said holding back production in the hope the iron ore price would pick up was not the answer.

“If we pulled back volume, that volume would be filled by other companies,” Wilson said.

“At the end of the day, we will be penalising in essence our shareholders.”

Analysts say the price of iron ore is unlikely to recover until at least 2016.

Westpac economist Justin Smirk said slower growth out of China and thousands of extra tonnages of cheaply produced ore would keep a lid on prices in the near-term.

Smirk said the start-up of Gina Rinehart’s Roy Hill mine later this year could also have a downward effect on the price of iron ore as the operation is poised to be a large, cheap supplier.

Last week Citi iron ore and steel trading head Mark Lyons said the price of iron ore could fall as low as $US50 a tonne.

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