5 MIN. DE LECTURA
(Repeats earlier story with no change in text. 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.
"What's needed to buoy the iron ore price? Vale, Rio Tinto, BHP Billiton to end their competitive supply surge and act more rationally in this weakened market," the analysts wrote.
"Vale's the last to deliver big tonnes to the market: if a moderation of its supply growth strategy is followed by the Australians, this will secure a price above that of market expectations," Crane and Price said.
The analysts suggested that Vale could constrain supply by slowing the ramp-up of its last major project, the 90 million tonne per annum S11D mine, or cut output from other, higher-cost operations.
Australian producers could then curtail their production rate, thus changing the market dynamics and taking advantage of the concentration of supply.
In short, the major iron ore miners need to change their current modus operandi of behaving like players in perfect competition to adopt a more oligopolistic approach.
Morgan Stanley is also slightly optimistic for iron ore, expecting a long-term price of $50-$60 a tonne, on the basis that not only do the majors have "significant, untested pricing power," but also that the project pipeline is closed and high-cost output is shutting down.
There is nothing wrong about the analysis, the only caveat is that events often unfold differently in the real world as to how they should given what's rational and makes economic sense.
I imagine it would take a major change of heart for the iron ore miners to turn around and exercise supply discipline.
It would have to be accompanied by some sort of acknowledgement that their current strategy of maximising low-cost output and competing fiercely with each other hasn't worked.
Standing up in public, admitting you have got it wrong and reversing strategy is probably the most difficult thing for any chief executive to do.
History shows that very few bosses survive that sort of admission, they are normally forced out by the board, or restless shareholders, thus allowing the new leader to implement strategic changes.
In some ways, the current chief executives of Rio Tinto and BHP Billiton, Sam Walsh and Andrew Mackenzie, have backed themselves into a corner by being such strong advocates of their current strategy.
Of course, declining profits and the possibility of cutting the dividends to shareholders may end their tenures anyway, but I would be surprised if the current leadership of Rio Tinto, BHP Billiton, or even Vale and Fortescue, acted in any meaningful way to lower output.
The question also has to be how much production would they have to cut before the supply-demand balance is fundamentally altered?
If they did start trimming output, or even slowing growth, it would allow smaller producers to remain alive and perhaps even increase their production.
And some of these miners aren't actually that small, witness the new 55 million tonne a year Roy Hill mine, which shipped its first cargo last week.
In a scenario of supply discipline from the big four, a company like Anglo American may be tempted to try and speed up the ramping up of its 26.5 million tonne a year Minas Rio mine in Brazil, having said on Dec. 8 that full output was now expected in 2018 instead of next year.
For the iron ore majors to have a chance of acting like a successful oligopoly, the closures of iron ore mines outside of their control has to be permanent.
It's possible, likely even, that sustained low prices will make this case, but the market probably isn't there just yet. (Editing by Ed Davies)