The cap was suggested by Andrew Forrest, chairman of Fortescue Metals Group (ASX:FMG), at an Austcham dinner in Shanghai. He’s now in some serious hot water after the Australian Competition & Consumer Commission (ACCC) called for an explanation on Wednesday — Australia takes such matters seriously, as attempting to fix or cap prices is illegal and punishable by financial penalties and up to 10 years of jail time.
Fortescue’s CEO Nev Power issued a letter the same day to explain Forrest’s statement, offer some background information with the hope of alleviating any concerns from the ACCC. “A strategy of concentrating market share in the hands of fewer is not good for our customers in the long run and Economics 101 tells us that it destroys shareholder value that can never be recovered,” Power states in the letter.
“The comments made by the Chairman were highlighting the point that a last man standing fight for market share will damage shareholders of all companies and is not in the long term interests of our host nation Australia nor of our customers and those comments were intended to draw attention to the fact that there is provision in Australia’s competition law dealing with the potential for discussions to be held by exporters,” he adds.
Bigger isn’t always better
It’s interesting to hear that type of logic from a big company like Fortescue considering the fact that other low-cost producers have been singing a different tune. In fact, Rio Tinto, BHP Billiton (ASX:BHP,LSE:BLT,NYSE:BHP) and Vale (NYSE:VALE) have all continued to up production despite the growing surplus of iron ore.
Furthermore, it’s worth noting that this isn’t the first time a large producer has struck down a suggestion to cut output. Walsh slammed the idea last month as well, saying that it wouldn’t be in his shareholders’ best interests. He also noted that while he knows “there are some people hanging on by their fingernails, you can only do that for a certain time and sooner or later you’ve really got to recognize the reality of life.”
Analysts have said Forrest’s statement should be taken as a sign of how tough the market has become. For instance, Brenton Saunders, an analyst from BT Investment Management, told Reuters, “they’re all criticizing each other because they’re all under pressure and under stress and they’re looking around for somebody to blame. But this outcome was designed by them collectively, not by any one of them individually,”
Where do juniors stand?
The falling iron ore price has made it difficult for smaller players to stay afloat, but that doesn’t mean all are sinking. Some, such as Cliffs Natural Resources (NYSE:CLF) and Iberian Minerals (TSXV:IML), are attempting to better their prospects by restructuring and selling non-core assets.
And there are still companies out there reporting good things. One example is Grange Resources (ASX:GRR), which reportedly received an average price of AU$105.40 per tonne for high-grade iron ore pellets in the two months up to February 28. Atlas Iron (ASX:AGO) is another company managing well in tough times; it recently reported a large reduction in production costs.
All that is to say that despite the bad news surrounding the iron ore space, bright spots do exist. In terms of where prices are at currently, The Australian notes that benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at US$54.80 a tonne on Thursday, down 1.3 percent from its prior close of US$55.50 a tonne. That’s within sight of the six-year low of US$54.20 it reached at the beginning of the week.
Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article. (By Resources Investing News)