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COMMENT
May 2015
MODERN MINING
3
T
he current furore – I’m writing
this in mid-May – over iron ore
production and prices in Australia
gives, I think, an indication of just
how important the mining of this
commodity is to the Australian economy. Not
only has the dispute put mining companies at
each other’s throats but it has also become a
national political issue, with talk of a parlia-
mentary inquiry into iron ore prices – and who
has been responsible for driving them down.
I would guess that most South Africans
would be inclined to believe that iron ore
mining is as important to us as it is to the
Australians and that we are one of the world’s
top producers. After all, Sishen in the Northern
Cape, which has a pit which now extends over
about 14 km after six decades of mining, is
generally perceived as being one of the world’s
biggest iron ore mines.
The reality though is that on a global scale
South Africa does not rate particularly highly
as a producer of iron ore. We come in at num-
ber seven in the world rankings, producing – in
2014 – just 78 Mt of total global production of
3,2 billion tonnes. By far the world’s biggest
producer is China (1,5 billion tonnes from
a multitude of mainly small and inefficient
mines) followed by Australia (660 Mt), Brazil
(320 Mt) and India (150 Mt).
If one looks at individual iron ore miners, our
biggest single producer is Kumba, which owns
not only the Sishen mine but also Kolomela
and Thabazimbi. These three mines between
them produced just short of 50 Mt in 2014. This
makes Kumba a fairly small producer in com-
parison to Vale (320 Mt in 2014 with 450 Mt
a year a possibility within several years), Rio
Tinto (234 Mt) and BHP Billiton (250 Mt).
The scale of the operations of the ‘big three’
is enormous. Vale, for example, produces over
100 Mt a year from just one mine – Carajás
in northern Brazil – while Rio Tinto’s highly
automated Pilbara operations in north-western
Australia encompass 15 separate mines, four
independent port terminals and a 1 700 km rail
network. BHP Billiton has seven mines in the
same area.
Getting back to the ongoing dispute in
Australia, it revolves around claims made
by Andrew Forrest, the founder of Fortescue
Metals Group (FMG), a big player in the
Pilbara, that BHP Billiton and Rio Tinto have
been deliberately driving iron ore prices down
by pumping up production in the face of fall-
ing global demand with the intention of forcing
smaller and less efficient rivals out of business.
He and FMG have even created a website – ‘Our
Iron Ore’ – which details the impact of falling
prices on Australia’s economy and which urges
action to create a sustainable iron ore mining
industry in the country.
Forrest recently explained his views at length
in an article in Australia’s
Daily Telegraph
. In
it he says that prices have “fallen off a cliff not
just because of international forces beyond our
control but because of the words and actions
of companies, particularly London-based mul-
tinationals who mine and export our iron ore.”
He goes on, “Now I believe in free markets, but
when CEOs pursue business strategies which
flood the market, in a last man standing race to
the bottom, we don’t have free markets.”
Representatives and allies of BHP Billiton
and Rio have hit back, both on and off the
record, claiming that FMG – now a roughly
160 Mt/a producer after starting from nothing
a decade ago – has had a far bigger percent-
age increase in production in recent years than
they have and that any attempt to ‘fix’ prices
would simply open the way for rivals such as
Brazil to take market share from Australia. BHP
Billiton’s Chief Executive, Andrew Mackenzie,
has also labelled the call for a parliamentary
inquiry into iron ore prices “a ridiculous
waste of taxpayers’ money” and argued that
low prices are a reflection of market forces – of
simple supply and demand.
The whole debate is an interesting one and
I can certainly see both sides of the argument.
But ultimately I think Forrest is wrong. The
reality is that markets rule and that there is
currently simply too much iron ore produc-
tion capacity in the world. Moreover, if Rio
and BHP Billiton – the two lowest cost produc-
ers in the world – believe that they can boost
tonnages and still make a profit, good luck to
them. As long as they’re not in collusion to
drive rivals out of business via predatory pric-
ing, they’re perfectly entitled to follow growth
strategies. Perhaps the real moral of the story is
that mining is a tough business and that only
the fittest survive.
Arthur Tassell
“Now I believe
in free markets,
but when CEOs
pursue business
strategies which
flood the market,
in a last man
standing race to
the bottom, we
don’t have free
markets.”
Andrew Forrest,
founder of iron ore
producer, Fortescue
Metals Group
Miners
at loggerheads over
collapse of iron ore price