It was one hell of a way to make an introduction.
Before last week, few in Australia’s iron ore industry had ever seen in person Lourenco Goncalves, chief executive of Cliffs Natural Resources, one of the largest iron ore producers in the US. But after his memorable address to the Global Iron Ore and Steel Forecast conference in Perth last week, he is unlikely to be forgotten for some time.
Appearing to relish being in the role of provocateur, Mr Goncalves walked into the back yard of iron ore heavyweights BHP Billiton, Rio Tinto and Fortescue and tossed metaphorical grenades in almost every direction.
The continued production growth from the majors was not a strategy, he said, but a path of destruction. Rather than drive iron ore prices down and push smaller miners out of business, the majors should have bought out and shut down the likes of Fortescue and in turn preserved higher iron ore prices.
Australia, he said, could have a case to answer to the World Trade Organisation given the efforts to push rival Chinese ore mines out of business and the helping hand they’ve received from the weakening Aussie dollar. And to cap it off, he added that his bleak diagnosis for the iron ore price would have deep and painful ramifications for the Australian economy.
Sitting down afterwards with The Australian, in his only one-on-one interview during his visit, Mr Goncalves said he took no joy in spreading such views but was motivated to speak up on behalf of the “disadvantaged and helpless”.
“The way the big iron ore companies are treating this entire situation is damaging for the businesses — not just the ones they are targeting, but for their business as a whole,” Mr Goncalves said. “It’s not something without consequences. The consequences will be deep, and they will have a lot of staying power.”
His opinions are more than just rhetoric. Mr Goncalves is entirely restructuring the 168-year-old Cliffs in anticipation that the meltdown in seaborne iron ore prices would be deep and permanent. Since taking control of Cliffs in August last year in a bloody boardroom coup, he has unwound what he says was the company’s previous strategy to become “another Rio Tinto”, which was not meant as a compliment.
Cliff’s coalmines have been put up for sale or sold, chromite and nickel interests have been exited and, most tellingly, the miner is looking to cut all its exposure to the seaborne iron ore market.
Mr Goncalves believes the challenges in seaborne iron ore go beyond the current Australian-led supply glut. Having worked closely with China since 1989, he believes the government’s commitment to tackling its notorious pollution problem is real.
Combined with the overcapacity in its steel industry and a forecast drop in consumption, Mr Goncalves believes China could eventually ban the purchase of iron ore fines — a lower-quality material that represents a huge part of Australia’s ore export volumes — which has environmental implications when smelted.
A Chinese ban on iron ore fines would be devastating for Australia, and in particular smaller producers. “If these junior miners are at 57 per cent (iron content) and all fines, in my opinion they are dead men walking,” he said.
“The only country that could eventually absorb that material is telling them that they are no longer willing to do so because they’re fighting pollution.”
Under Mr Goncalves, Cliffs has also joined US steelmakers in filing complaints to regulators over the alleged dumping of steel imports into the US. Any action if successful would only add to the pressure being felt by Chinese steel mills, which are already battling razor-thin margins, a dim outlook and growing environmental pressure.
Finally, Mr Goncalves wants to clear one thing up. During a recent results call, he made headlines by referring to iron ore billionaire Gina Rinehart as “Gina whatever”. It was, he said, a temporary mental blank and he meant no disrespect.
“But she is bringing on a lot of capacity that the market doesn’t need,” he said, in reference to her $10 billion Roy Hill iron ore mine under construction. About $US694m of that was funded by the Export-Import Bank of the US.
“For me it’s an unforgivable sin that the US government committed,” he says. “It’s against the charter of the Exim bank. They can’t help an American company by creating a complication for another American company.”
Source: The Australian Business Review.
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