Fortescue Metals Group (FMG) founder and chairman Andrew Twiggy Forrest did his best again to wave a big red flag to his creditors yesterday and tell them the iron ore miner’s finances remain strained.
On Tuesday night he called for BHP Billiton (BHP) and Rio Tinto (RIO) to join Fortescue in capping iron ore production and sales in an effort to drive up prices.
News of the call broke as spot iron ore prices edged up 1.9% on Wednesday morning.
To some in the market Mr Forrest’s call was music to the ears – the shares rose 2.7% to $2.065, while BHP shares dropped 0.3% to $31.11 and Rio lost 1% to $56.83.
Perhaps sceptical investors see Fortescue as the only beneficiary of a cap.
FMG 2Y – Fortescue adds to Pilbara production, now calls for cap
But the call drew the attention of the competition regulator the ACCC which said yesterday the iron ore pricing situation would be monitored closely.
But Mr Forrest, or someone close to the company, told the media yesterday that the comments have not broken any laws and will release a statement saying the offer to join with BHP and Rio (and Vale of Brazil) to drive up prices doesn’t break the Competition and Consumer Act.
In his comments at a dinner in Shanghai on Tuesday night, Mr Forrest claimed a cap would drive up prices, lift export income, company profits and tax revenues for the Federal Government.
“I’m happy to put that challenge out there: let’s cap our production right here and start acting like grown-ups,” Mr Forrest was quoted as saying.
Mr Forrest predicted that the steelmaking ingredient’s price, which has more than halved over the last year to below $60 a tonne, could go “straight back up to US$70, US$80, US$90” if his three bigger rivals – Rio Tinto, BHP and Vale – agreed to cap production.
But would Vale agree? Its finances are under pressure and it’s controlled by the Brazilian government, which is also under pressure and facing a ratings downgrade by nervy rating agencies.
The last thing Vale wants is to cut production and cashflows, which would drive up its debt and its interest costs and damage its (and the government’s) already weak rating.
Mr Forrest forgot that it would be quite easy for the Chinese and Japanese steel mills to source their iron ore from Vale of Brazil, which would be only too eager to sell it to those buyers for less than the Australian companies wanted to (it’s called price cutting).
A cap on production would antagonise Chinese buyers, the Chinese government and its increasingly aggressive competition agency.
Smaller Australian exporters would also be tempted to undercut Fortescue’s cap and sell as much iron ore as they could.
Mr Forrest wants BHP and Rio to cede their current domination of the world iron ore market to give him a break and to give Fortescue a leg up – which does seem strange.
The call shows how much pressure Mr Forrest and Fortescue remain under after the collapse of the refinancing effort last week of $US2.5 billion of debt.
ACCC Chairman Rod Sims called upon Mr Forrest to explain his calls for the world’s biggest iron ore producers to work together to put a cap on iron ore production.
“The ACCC will be looking closely at Mr Forrest’s comments and the context in which they were made. In general terms, any attempt by Australian businesses to encourage competitors to restrict outputs is a matter of grave concern to the ACCC,” Mr Sims said.
“Ultimately, any success in increasing the price of iron ore in an anti-competitive way would be expected to lead to an increase in prices that Australian consumers pay for items such as whitegoods and cars.”
