Fortescue's Andrew Forrest calls for iron ore production cap, page-24

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• Mar 26 2015 at 2:07 PM

Rio Tinto's Sam Walsh slams Fortescue boss Andrew Forrest's 'harebrained' iron ore cheme

by Amanda Saunders

Rio Tinto boss Sam Walsh says capping iron ore production is "absolutely not" in Australia's national interest, and has dismissed Andrew Forrest's offer to put a cap on Fortescue Metals's production if others will do the same as "nonsense" and a  "harebrained scheme".

"I don't know what Andrew was thinking," Mr Walsh said to a packed mining industry lunch on Thursday.  
"I think the comments are absolute nonsense, I'm not sure if Andrew actually sought legal comment before."

Mr Forrest has told Fairfax Media that he stood by comments made in Shanghai at a function on Tuesday evening, where he offered to put a cap on Fortescue's production if others would do the same.

He also suggested controlling production would trigger a price recovery.

His comments have sparked an ACCC investigation into whether the FMG chairman has breached the competition law.

Mr Walsh would not be drawn into whether the comments fell foul of Australian law but said - "I can assure you international law does not (allow it)".

He said introducing caps was anti-competitive, and would not be in Australia's best interests. And Mr Forrest's outburst was likely to have been poorly received by his Chinese customers.


"It (a cap) won't help us in the longer term to prop up projects that are actually not competitive.
"It is essential that we foster Australian industry…that is internationally competitive, and is not being propped up by tariffs or artificial means. That is not a way to run this great country. We have the wherewithal to be competitive with our mining, and to try to artificially prop it up with some harebrained scheme, that is just physically not going to do it."

"And I'm not sure that the Chinese customers of Andrew would appreciate those comments anyway".
Rio and BHP argue that if they don't continue to produce – which even at current prices attract a big margin – then their competitors will simply fill the gap, and higher prices will incentivise new projects into the market.

Mr Walsh also stressed on Thursday that Rio does not collude with its iron ore competitors.  
Mr Forrest says he is protected by an exemption in the Australian Competition and Consumer Act encouraging Australian exporters to act in the nation's interest.

He told Fairfax Media he is "absolutely" confident that section 51(2)(g) allows him to propose the production cap he has floated.

Fortescue - the fourth biggest iron ore producer behind Brazil's Vale, Rio and BHP - has contributed a huge portion of the flood of new supply.

From the four years to December 2014 inclusive, 248 million new iron ore tonnes hit the seaborne market from Rio, BHP and Fortescue.

Of that increase, Rio accounted for 63 million tonnes, or 25 per cent, while Fortescue accounted for 43 per cent, or 106 million tonnes, albeit from a much lower production base.

But Fortescue's expansion is slowing, and its margins are under huge pressure after the dramatic price fall in the past year to about $US55 a tonne.

The Fortescue chairman pointed to Glencore chief executive Ivan Glasenberg's decision to withhold coal production in Australia in an attempt to show that the majors' rationale for expansion was "fallacious".
"It hasn't happened in coal. Glasenberg withdrew a significant amount of coal from the market, no one stepped in," he said.

Mr Glasenberg has gone to lengths to position himself as a superior marketing manager to Sam Walsh, saying earlier this month that he was slashing coal output because "we don't want to be the ones forcing the price down with oversupply".

Last week, West Australian Premier Colin Barnett launched yet another attack on Rio and BHP, labelling their iron ore expansion strategies "dumb". He is nursing deep wounds inflicted on the state budget by his Treasury's wildly optimistic price forecasts for the commodity.

Rio is on track to produce at least 330 million tonnes this year and 350 million tonnes by 2017.  But the miner has deferred for at least a year a decision on its undeveloped Silvergrass iron ore project, which it needs to hit and sustain its 360 million tonnes per annum target. BHP is on track to hit its 245 million tonnes target this financial year, as it guns for 290 million tonnes per annum by 2017.