Modern Mining May 2015

COMMENT

Miners at loggerheads over collapse of iron ore price

T he current furore – I’m writing this in mid-May – over iron ore production and prices in Australia gives, I think, an indication of just how important the mining of this commodity is to the Australian economy. Not only has the dispute put mining companies at each other’s throats but it has also become a national political issue, with talk of a parlia- mentary inquiry into iron ore prices – and who has been responsible for driving them down. I would guess that most South Africans would be inclined to believe that iron ore mining is as important to us as it is to the Australians and that we are one of the world’s top producers. After all, Sishen in the Northern Cape, which has a pit which now extends over about 14 km after six decades of mining, is generally perceived as being one of the world’s biggest iron ore mines. The reality though is that on a global scale South Africa does not rate particularly highly as a producer of iron ore. We come in at num- ber seven in the world rankings, producing – in 2014 – just 78 Mt of total global production of 3,2 billion tonnes. By far the world’s biggest producer is China (1,5 billion tonnes from a multitude of mainly small and inefficient mines) followed by Australia (660 Mt), Brazil (320 Mt) and India (150 Mt). If one looks at individual iron ore miners, our biggest single producer is Kumba, which owns not only the Sishen mine but also Kolomela and Thabazimbi. These three mines between them produced just short of 50 Mt in 2014. This makes Kumba a fairly small producer in com- parison to Vale (320 Mt in 2014 with 450 Mt a year a possibility within several years), Rio Tinto (234 Mt) and BHP Billiton (250 Mt). The scale of the operations of the ‘big three’ is enormous. Vale, for example, produces over 100 Mt a year from just one mine – Carajás in northern Brazil – while Rio Tinto’s highly automated Pilbara operations in north-western Australia encompass 15 separate mines, four independent port terminals and a 1 700 km rail network. BHP Billiton has seven mines in the same area. Getting back to the ongoing dispute in Australia, it revolves around claims made by Andrew Forrest, the founder of Fortescue Metals Group (FMG), a big player in the

Pilbara, that BHP Billiton and Rio Tinto have been deliberately driving iron ore prices down by pumping up production in the face of fall- ing global demand with the intention of forcing smaller and less efficient rivals out of business. He and FMG have even created a website – ‘Our Iron Ore’ – which details the impact of falling prices on Australia’s economy and which urges action to create a sustainable iron ore mining industry in the country. Forrest recently explained his views at length in an article in Australia’s Daily Telegraph . In it he says that prices have “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 mul- tinationals who mine and export our iron ore.” He goes on, “Now I believe in free markets, but when CEOs pursue business strategies which flood the market, in a last man standing race to the bottom, we don’t have free markets.” Representatives and allies of BHP Billiton and Rio have hit back, both on and off the record, claiming that FMG – now a roughly 160 Mt/a producer after starting from nothing a decade ago – has had a far bigger percent- age increase in production in recent years than they have and that any attempt to ‘fix’ prices would simply open the way for rivals such as Brazil to take market share from Australia. BHP Billiton’s Chief Executive, Andrew Mackenzie, has also labelled the call for a parliamentary inquiry into iron ore prices “a ridiculous waste of taxpayers’ money” and argued that low prices are a reflection of market forces – of simple supply and demand. The whole debate is an interesting one and I can certainly see both sides of the argument. But ultimately I think Forrest is wrong. The reality is that markets rule and that there is currently simply too much iron ore produc- tion capacity in the world. Moreover, if Rio and BHP Billiton – the two lowest cost produc- ers in the world – believe that they can boost tonnages and still make a profit, good luck to them. As long as they’re not in collusion to drive rivals out of business via predatory pric- ing, they’re perfectly entitled to follow growth strategies. Perhaps the real moral of the story is that mining is a tough business and that only the fittest survive. Arthur Tassell

“Now I believe in free markets, but when CEOs pursue business strategies which flood the market, in a last man standing race to the bottom, we don’t have free markets.” Andrew Forrest, founder of iron ore producer, Fortescue Metals Group

May 2015  MODERN MINING  3