Could WES be interested in FMG?, page-39

Maybe excess supply is coming out of the market quicker than I assumed:

The world's biggest miners of the bulk commodity have accumulated an unprecedented amount of pricing power after boosting market share, according to Morgan Stanley, which said they may now have an incentive to use the new-found clout by curbing supply to spur a rally.

The four largest producers - Vale, Rio Tinto, BHP Billiton and Fortescue - have expanded their combined share of global supply to 75 per cent after they raised low-cost output and smaller rivals quit, the bank said in a report.

While boosting output as quickly as possible was the most rational approach for the top miners over the past decade, they may now need new strategies after the market weakened, Morgan Stanley said.
"What's needed to buoy the ore price? Vale, Rio Tinto, BHP Billiton to end their competitive supply surge and act more rationally in this weakened market," analysts Tom Price and Joel Crane 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."

Spot iron ore delivered to Qingdao port in China dropped 4.3 per cent last week to $US38.30 a tonne on Friday, a record low in daily prices compiled by Metal Bulletin going back to May 2009. The commodity has sunk 80 per cent from its peak in 2011.

"Most in the market are transfixed on the ore price's collapse, convinced that the passing of the commodity boom has permanently crushed the value in this trade," the bank said. "However, the price fall has also prompted the closure of high- cost production worldwide, including in China. Indeed, this market structure is evolving rapidly into one of the most highly consolidated trades."

Morgan Stanley said while top producers had a similar share of global supply during the annual benchmark era before 2005, the demand-side was even more consolidated at that time as only the top mills in Japan and Korea represented all Asian suppliers. Since then, China's entry distorted the consumer-side and the major miners now possess an unprecedented level of pricing power, it said.

"At current price levels, the incentive exists for them to exercise it," the bank said.