COLUMN-Should iron ore miners become an oligopoly to rescue prices?: Russell
(The opinions expressed here are those of the author, a columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia Dec 15 (Reuters) - - One of the largely unseen side-effects of the massive increase in iron ore supply and the subsequent collapse in prices is that the industry is now one of the most concentrated in the resources sector.
As any student of economics can tell you, highly-concentrated supply tends to lead to oligopolistic behaviour, in which the major producers limit output in order to drive prices higher.
This clearly hasn't happened, and isn't currently happening in iron ore, despite about 75 percent of traded supply being delivered by just four producers.
Morgan Stanley analysts Joel Crane and Tom Price wrote in a report published on Dec. 11 that major iron ore miners now have an incentive to exercise market power.
Traded iron ore is now the second-most consolidated commodity, behind platinum, using the Herfindahl-Hirschman Index, which measures company sizes against that of the industry, according to the report.
Iron ore supply is dominated by Brazil's Vale, followed by the giants of Western Australia's vast Pilbara deposits, Rio Tinto, BHP Billiton and Fortescue Metals Group.
As these companies have added hundreds of millions of tonnes in new supply, the spot iron ore price .IO62-CNI=SI, which is now only a fifth of its all-time high, closed at $37.50 a tonne on Monday, just higher the $37 on Dec. 11, which was the lowest since spot assessments started in 2008. Continuación...