Former Fortescue Metals Group chairman Gordon Toll says the heads of the world's largest iron ore miners have exhibited "appalling ignorance of major economic market structures" and have created a global "debacle" that could last for decades.
Mr Toll, who now heads locally-listed magnetite hopeful Royal Resources, served as chairman of Fortescue from May 2005 to March 2007 while the company was in its development phase.
Adding his name to the list of prominent critics of the miners' expansion strategies, Mr Toll said he was shocked shareholders of BHP Billiton, Rio Tinto, Vale and Fortescue had remained silent while their companies pressed ahead with expansion plans which would depress prices.
"The first thing is why are the shareholders not screaming and I think that's part of the second thing which is both the executives of these companies and the shareholders are showing massive ignorance of major economics and market structures," Mr Toll told Fairfax Media.
"I don't believe Jimmy Wilson or Andrew Harding, any of those people, ever believed they were going to drive the iron ore price down to where they have driven it but that is because they do not understand major economics."
The iron ore spot price peaked at more than $US180 a tonne in 2011, but has plummeted in the past 18 months to a year-low of $US47 a tonne in April. Iron ore was trading at about $US64 a tonne on Tuesday, as Goldman Sachs and Royal Bank of Canada reiterated to clients they expected the recent rally to be short-lived, with both banks expecting prices to fall back towards $US50 a tonne due to sustained levels of supply.
Fortescue and other iron ore miners have accused BHP and Rio of continuing to push tonnes into a depressed market in order to drive smaller players out of the sector. Fortescue's chairman Andrew Forrest argues the companies' public stances on expanding regardless of the iron ore price disconnected the price from traditional supply and demand levers and caused it to plummet.
BHP and Rio have defended their strategies on the basis it makes commercial sense for them to lower costs and increase production to improve margins, and that if they didn't meet global demand, other producers would.
Mr Toll said the war of words was "a mindless mantra of free and efficient markets" and ignored the destruction of shareholder value that had occurred.
"The iron ore business is an oligopoly," he said. "In any well managed oligopoly you manage for margins not for volume. Managing the volume is a sure fire recipe of achieving exactly what Mr Walsh and Mr Mackenzie and the people running Vale and Fortescue have achieved. We have a debacle and it's the shareholders that are being hurt."
Asked what he believed should be done to remedy the situation, Mr Toll, who does not have shares in BHP, Rio or Fortescue, said any action was difficult.
"Once the dance of death starts, you can't stop the music, the orchestra keeps playing," he said. "Who is going to be the first to cap production? They have all issued statements that they are going to slow down their expansions but the damage is done. I have seen whole industries stay in these kind of comatose states for decades... the American natural soda ash industry which has been in this comatose state since the early 1980s because of the same misunderstanding of the market.
"If they get together and do certain things they will have an ACCC inquiry. They should be trying to maintain their margins for their shareholders benefit because that is what is going to bring in the highest net revenue for shareholders, for the country and for national and state coffers."
Calls for a federal government inquiry into the struggling sector have abated but the debate continues to bubble away, with the Minerals Council of Australia launching a website on Monday to "better inform the community about Australia's iron ore industry".
The Iron Ore facts website is the second to crop up in recent weeks, after the launch of Our Iron Ore, a website backed by Fortescue and launched with the support of juniors Atlas Iron and BC Iron.
Minerals Council chief executive Brendan Pearson said the website "addresses some of the myths that have been peddled in recent weeks about the industry". The site presents ten facts about the industry and "debunks" nine myths. It appears to be a direct response to the Our Iron Ore website, highlighting "the iron ore market share of Rio Tinto and BHP Billiton has remained steady for a decade, despite growth in global demand."
"In the past 5 years the biggest growth in iron ore production in Australia has come from Fortescue Metals Group which has increased production by 106 million tonnes," the Iron Ore Facts website says. "This is compared to BHP Billiton with 80 million tonnes and Rio Tinto 63 million tonnes."
The Minerals Council represents more than 100 miners, including BHP and Rio Tinto. It does not count Fortescue Metals Group as a member and is a vocal opponent to any parliamentary inquiry into the industry.
Source: The Sydney Morning Herald
- metaljunction »
- Metal News
Metal News & Events
METALJUNCTION PUBLICATIONS
Coal Insights (English) Monthly
![Steel Insights](/assets/images/news/coal-insights.jpg)
Coal Insights is a ready reckoner for anyone associated with coal. This publication is aimed at tracking everything related to coal in India.
India Coal Market Watch(English) Monthly
![Steel Insights](/assets/images/news/ICMW_Jan09.gif)
ICMW is a one-stop source for all news, data and research pertaining to coal demand, consumption, stocks, spot- and long-term prices with respect to the Indian Market.
India Steel Market Watch (English) Monthly
![Steel Insights](/assets/images/news/ISMW.gif)
ISMW is a brand new high-end steel market report, covering all aspects of the steel industry in India.
Steel Insights(English) Monthly
![Steel Insights](/assets/images/news/SteelInsights.jpg)
Steel Insights delves into various facets of the domestic and global steel industry such as market fundamentals, raw material price trends, price forecasts etc.