27 de marzo de 2015 / 13:07 / en 2 años

RPT-COLUMN-Forrest's iron ore cap "harebrained" or clever tactics?: Russell

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--Clyde Russell is a Reuters columnist. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, March 27 (Reuters) - What’s the real thinking behind Andrew Forrest’s remarkable call for iron ore miners to cap production in order to boost prices?

It’s easy to dismiss the comment by the Fortescue Metals Group founder and chairman as “harebrained,” as did Sam Walsh, the chief executive of Rio Tinto, the world’s second-largest iron ore miner.

It’s possible that when Forrest told an audience on Tuesday in Shanghai that he was happy for iron ore miners to “cap our production right here and start acting like grown-ups”, he was merely having a thought-bubble moment.

But while Forrest, whose company ranks fourth in the world in iron ore output, has a reputation as a charming straight-shooter, it’s hard to imagine that he would be so careless as to float an idea that in all likelihood is illegal and would also bring scorn from his bigger rivals.

There is no doubt that debt-laden Fortescue has been hit harder than Rio Tinto or No.3 producer BHP Billiton by the collapse of iron ore prices, with the Asian spot price .IO62-CNI=SI marking a record low of $54.20 a tonne on Monday, before recovering slightly to $55.50 on Thursday.

Desperate times call for desperate measures, and Forrest’s comments need to be seen in this light.

At the current spot price of iron ore, several analysts estimate Fortescue is losing money for every tonne of the steel-making ingredient it produces.

His company also recently tried to raise $2.5 billion through a bond sale, but scrapped the issue two weeks ago after potential investors demanded hefty interest rates.

The money would have been used to pay off bonds due in 2017, 2018 and 2019, and although Fortescue said there was no urgent need for re-financing, the cancellation of a bond sale shows heightened investor caution over the outlook for the company.

NOT SERIOUS ABOUT OUTPUT CAP

It’s also fairly certain that Forrest wasn’t really serious about capping Fortescue’s own iron ore output, rather he expected Rio Tinto, BHP and top producer Vale to do all the heavy lifting.

This is because he said he would limit his company’s output to 180 million tonnes, which is already 20 to 25 million tonnes above its forecast production for this year.

Saying to your rivals that they should cut output while you raise yours is always going to get you nothing more than a dismissive rejection, with Rio’s Walsh duly delivering.

However, Forrest’s comments may well be aimed at building political capital and portraying his bigger rivals as the “bad guys” in the iron ore rout.

Iron ore is Australia’s most valuable export commodity and politicians and the wider public have watched with increasing alarm as the price has collapsed.

Politicians, including the premier of Western Australia state, where the vast majority or iron ore mines are located, have expressed concern over the falling price, and therefore declining royalties.

Colin Barnett, who heads the pro-mining Liberal Party-led Western Australia government, has been clear in laying the blame for the declining royalties at the door of the major miners and their massive expansion of iron ore production.

Forrest’s comments may fall into the general category of searching for a scapegoat and positioning yourself as the victim of circumstances beyond your control.

It’s a long-established tactic to try and portray your rivals as heartless multinational corporations, who through their actions are driving the little guy to the wall.

In some ways Rio Tinto and BHP Billiton have made it easier for Forrest, and others, to do this, by repeatedly stating that the iron ore business should be about the survival of the fittest, and they are the fittest.

That’s true, the low-cost structure of their mines and the efficiency with which they are operated mean that Rio and BHP are still profitable at the current low prices.

It’s valid to question their tactic of flooding the market with iron ore in order to drive out competitors, although it does seem to be working and it certainly has given BHP and Rio shareholders much joy in the past few years.

Forrest may also have been hoping to deflect attention away from the fact that much of the huge addition of capacity in the past four years has come from his own company.

Fortescue has added about 100 million tonnes of output since 2011, more than either Rio or BHP, but Forrest would prefer you don’t see his company as part of the problem.

Editing by Joseph Radford

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