Are BHP, Rio and FMG stupid, page-9

In my lifetime, I have seen the following happen many times... perhaps you have too.

Woolworths builds a supermarket close to an independent supermarket that is doing well. When this new Woolworths store opens it has low prices, lower than those of its competitor. The independent supermarket lowers its prices to match the big operator. Then, Woolies lowers its prices still further.

With deeper pockets than the independent supermarket, Woolies can even afford to operate at a loss in the short-term. Because, WOW management knows the independent supermarket has a high cost-base and it will have to close shop, sooner or later, if it is not profitable. The little guy just can't compete.

Eventually, the independent is killed-off and guess what happens? Woolworths puts up its prices and starts making hay. After the low prices disappear, the Woolworths store continues to service a strong demand for its goods over many years to come, making high margins.

This is called market power.

RIO, BHP and Vale have market power in the IO market. They are deliberately killing off the competition. It is not stupid, unless you are only thinking about this quarter, half-year or year. Will RIO, BHP and Vale be around longer than that?

These big IO producers continuing to increse production as prices fall are making a strategic decision to do so. It is in their own (medium and long-term) interest to do so. They want to drive away the competition, and then make a motza.

The (medium and long-term) outlook for the demand side of the IO market is strong. The current "production war" is all about who is going to supply this demand. RIO, BHP and Vale will, for sure, along with the survivors of the current "production war".

P.S. My picks (and positions) in this sector are RIO and AGO. RIO is the safe bet (IMO) and the premier IO producer in the world (again, IMO). AGO is now my speculative play in this space (I'm out of FMG).

P.P.S I can see the validity in the argument above from the State's "finite resources" perspective too. It is true Australia and WA are not beneficiaries of low IO prices for their finite resources. However, I think RIO and BHP (as independent entities) don't care about sovereign concerns such as these.