8 de julio de 2015 / 12:00 / hace 2 años

RPT-COLUMN-Miners paint rosy iron ore picture by skirting tough issues: Russell

6 MIN. DE LECTURA

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

By Clyde Russell

LAUNCESTON, Australia, July 8 (Reuters) - Australia's major iron ore miners have had a torrid year so far, battling low prices, engaging in an ugly slanging match with each other and dealing with persistent questions about the wisdom of their expansion strategies.

It was therefore not surprising when the mining industry's peak body launched a report on Tuesday that puts quite a different spin on the iron ore industry.

The Minerals Council of Australia's report, entitled "Iron Ore: The Bigger Picture", points out the enormous benefits the industry has brought Australia and will continue to provide.

The major Australian iron ore miners, Rio Tinto and BHP Billiton, are members of the council and sit on the board of directors, but the country's third-biggest producer, Fortescue Metals Group, is absent from the list.

The report doesn't really make an effort to explain how the major miners got their forecasts on Chinese demand so wrong, and it glosses over whether they really expected the price to fall as low as it has.

Spot Asian iron ore .IO62-CNI=SI has been pummelled in the commodity sell-off in recent days, dropping to $49.70 on Tuesday, approaching the record low of $46.70 hit in April.

What the report does do is present a positive outlook by highlighting the iron ore sector's contribution to the Australian economy.

Revenue from the industry totalled more than A$430 billion ($321 billion) in the decade from 2005 to 2014, and this will rise to over A$600 billion in the next 10 years, even assuming no further output growth and prices staying at low levels.

The report also points out that the bulk of this revenue accrues to suppliers and governments, with suppliers getting 53 percent in the 2010-2014 period, governments taking 24 percent, and the rest for investors.

The report's other main points include that iron ore is alone among Australia's major commodity exports in increasing market share in the past decade, and that this gain in market share was in the national interest as the extra volume produced was needed to offset the decline in price.

It's certainly a laudable achievement that Australia's iron ore producers managed to increase their share of the seaborne market from 34 percent in 2000 to 50 percent, while keeping costs at the lower end of the curve.

The report says the iron ore market has followed the typical pattern of commodity cycles in the past decade, namely a demand increase prompting a price rise, followed by a supply response and an eventual return to more long-run average prices.

The argument is that anybody who thought the high prices that prevailed when iron ore reached a record just above $190 in early 2011 would persist was out of step with sensible analysis.

The report also makes the case that any form of intervention in the market to regulate supply would most likely end in failure and would be against the national interest.

Circular Arguments

It's perhaps not too surprising that many of the report's points dovetail with the public comments by executives from both Rio and BHP, the number two and three iron ore producers behind Brazil's Vale.

They have long argued that the decision to massively expand output at their mines in Western Australia was justified as they had access to economies of scale, world-class resources and competitive advantages against other producers.

The argument is also that if they hadn't expanded, then competitors would have and prices would have fallen anyway, and Rio and BHP wouldn't have had the volume to make up for the lower prices.

These tend to be circular arguments that don't really end up with a satisfying conclusion, as can be seen by the fallout earlier this year after widely pilloried comments by Fortescue boss Andrew Forrest that the miners, but not really his company, should limit output in order to boost prices.

What the report does achieve is it sets out a rational economic defence of what Rio and BHP did to lead Australia's iron ore output from 170 million tonnes in 2000 to around 660 million in 2014.

But the report brushes over the miners' price outlook that underpinned the massive investment, saying it is "very tightly held for commercial reasons".

It then goes on to state that the market consensus was for prices to fall, which is true, but at the time of the record high in 2011 and as recently as last year, the market consensus was way more optimistic than the current price reality.

There are really only two plausible explanations.

First, the mining companies expected iron ore prices to tumble as dramatically as they have, and kept the information to themselves. And the second, more likely, explanation is that they were also caught by surprise by the sharp decline and the ongoing poor outlook for recovery.

The report also makes no mention of the forecasts for Chinese steel production, which were central to decisions to expand iron ore output.

While Rio and BHP would have been in good company in forecasting a rise to at least 1 billion tonnes a year of Chinese steel output a few years back, they are probably the only ones left who still expect this.

The market consensus is that peak steel output of just over 800 million tonnes per annum has already been reached, and while it won't decline dramatically in coming years, it won't be going anywhere close the miners' optimistic forecasts.

So far executives from both BHP and Rio have maintained they have followed the correct strategies, but the poor performance of the share prices suggest investors don't share this view, or at least not entirely.

The Minerals Council report continues in this vein, offering solid and plausible reasons for what has happened, but skirting some of the more difficult issues facing the iron ore industry.

Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund. (Editing by Himani Sarkar)

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