rio comments, page-28

Hi UIO,

Thanks for promoting what I think has been a very good discussion of issues relevant to BRM, but also any small iron ore player within the region. Your comments re risks/rewards associated with BRM’s testwork on upgrading their ore to acceptable grade/contaminant levels are noted and accepted as reasonable.

I do however wish to question your logic as to how FMG will determine access to its rail network. FMG have sought to have RIO and BHP lines declared via the NCC and have pursued the matter successfully so far in the courts. FMG have argued that the rail access should be open and non-discriminatory. Consistent with this, FMG has established its own rail line on open access and non-discriminatory principals.

In case this is in dispute and/or for the background benefit of others, an internet search will confirm that the FMG rail line was given Government sanction via the Railway and Port (The Pilbara Infrastructure Pty Ltd) Agreement Bill 2004. The purpose of this Bill was to “Ratify and authorise an Agreement (scheduled to the Bill) between the State, Fortescue Metals Group Ltd and The Pilbara Infrastructure Pty Ltd for the development of a …. multi-user railway and multi-user port facilities; and to give statutory backing to open access arrangements for the multi-user railway and put in place a process to establish open access arrangements for the port facilities.”

If it is accepted that FMG have established a rail line based on open access and non-discriminatory principals (as per government legislation), I do not understand how your logic for access can apply. I have included your initial three paragraphs for reference as follows.
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1) If you can only ship XX MT of ore a year regardless of grade, shipping the best ore means your cost per tonne as a percentage of revenue is decreased.
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Accepted.

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2) If you have as much lower grade ore as you need for the foreseeable future (say, a couple of billion tonnes of reserves @ 57%) then in order to achieve point 1, you obtain high grade from ppl who need to use your infrastructure. You may also choose to blend this higher grade ore in order to obtain a better price on your lower grade ore.
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This suggests access is not open and is in fact discriminatory (ie it is based on Fe grade)

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3) Following on from points 1 and 2, there is no incentive to let someone else ship lower grade ore and pay you a margin of $10 hypothetically. Why do that when you can dig out and ship If you have to let third party ore onto your rail line, all things being equal you are bound to choose high grade high quality ore because you can demand a higher margin AND use it to blend.your own ore cheaper and make more than $10 on it?
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The first part of point 3 suggests that FMG can discriminate against lower grade miners and retain the rail line primarily for its own use. My understanding is that 100MT of rail excess capacity was built into the line (as per Government requirements) for use by other economically viable mining hopefuls.

The last part "higher margin and use it to blend" implies an even less open access regime and even more discrimination than that applying under point 2 above (ie its based on Fe grade and access charge). FMG cannot use its monopoly track owner position to gauge profit from a miner that has high grade ore (via inflated track margins) or deny access simply because a company has lower grade ore which has little benefits to FMG’s downstream operations. If its an open access regime all access users should pay a price based upon tones moved and distance.

That is not to say that FMG may provide a downstream blending benefit payment to a miner with high grade ore. However, they will have to be careful to ensure this is done in a non-discriminatory way. I have not been able to look at the FMG releases that you mention that indicate their desire to seek a downstream blending outcome. However, I do not see that this would be inconsistent with open access and non-discrimination as long as it does not dominate access outcomes.

I suppose the next question is given that these are private and confidential contracts how will any access charge/access dispute be reconciled? My understanding is that a miner can threaten legal action under the Trade Practices Act (that FMG has used to great effect to gain access to BHP/RIO lines). In particular, Division 6A of the Act (Pricing principles for access disputes and access undertakings or codes) requires that access price structures should:

"(i) allow multi-part pricing and price discrimination when it aids efficiency; and
(ii) not allow a vertically integrated access provider to set terms and conditions that discriminate in favour of its downstream operations, except to the extent that the cost of providing access to other operators is higher."

In addition, a miner being rejected access can seek to have the FMG line declared by the NCC (typically completed within 4 months of application) and then have an economic regulator investigate whether the denied access is discriminatory or not.

Will FMG tie access users up in long drawn out legal battles. I don’t think so. Firstly, its early days and FMG will want to get track/port utilization up to profitable levels. Secondly, FMG would be contradicting their own arguments put up against BHP/RIO. They would be easy targets in this regard. Finally, FMG have a declared ‘open access’ track/port. This is not the case with BHP/RIO who have understandably sought to delay access as long as they can.

In summary, I am less concerned about rail access and more concerned regarding upgrade risks re ore quality/contaminants.

Sorry about the length of reply, but UIO has raised some good points that are worthy of discussion. As backround, I only just learnt to spell "iron ore" last month and have been reading up to learn as much as possible. Thus, I may have possibly misread the situation. I am an economist and my partner is an regulatory manager dealing with access issues in a non-rail industry. I have run my thoughts past her before posting.

Needless to say, if I'm wrong - its her fault.

Cheers

Bleasby.