By now, most readers should be familiar with the swirling forces in the iron ore sector, but if you're just returning from the Easter holidays, here's a quick recap:
- BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are massively increasing production and cutting costs, apparently driving a global decline in iron ore prices
- Federal Treasurer Joe Hockey is contemplating a forecast iron ore price of just US$35 per tonne for his May budget, nearly $15 lower than current prices
- That means a massive black hole in the budget, not just federally but also in mining states like Western Australia
- Western Australia Premier Colin Barnett is not a happy camper, and feels that the major miners are doing the wrong thing by the state – which is the owner of all iron ore within its borders
This protracted evolution leads us to last Friday morning, with Fortescue Metals Group Limited (ASX: FMG) chief Nev Power calling for government intervention to repair the sector.
Mr Power was quoted by Fairfax media, stating that the BHP and Rio driven ore surplus had ripped the heart out of the industry, and suppliers, contractors and communities affiliated with the industry.
He's not wrong, with affiliated companies' share prices having been completely crushed in the past twelve months.
Transport company McAleese Ltd (ASX: MCS) could be staring into the pit if Atlas Iron Limited (ASX: AGO) is wound up.
Other businesses like Monadelphous Group Limited (ASX: MND) and UGL Limited (ASX: UGL) have also suffered in the wake of falling resource prices.
With everybody losing out and a growing shortfall in State and Federal budgets, surely the stage is set for the government to intervene?
Maybe, but I think government intervention is very unlikely, for these reasons:
- Australia is a free-market society, and we have a Liberal government which is traditionally encouraging of free enterprise
(This one speaks for itself, but I wrote on the topic in more depth in this article here)
- Production restrictions would be difficult and costly to enforce
(Who are you going to pay to do it, and how will they keep track?)
- Limiting production is of dubious legality, and anti-competitive
(Previous comments on the topic from Fortescue Chairman Andrew Forrest nearly landed him in hot water with the ACCC)
- Raising iron ore prices could wreck diplomatic relations, particularly with China, given our Free Trade Agreement
(As our biggest trade partner and driver of growth, nobody wants to tick off Beijing)
- Previous interference a la 'the mining tax' helped sink the Labour government
(With much help from big business and the Liberal party, who won't be rushing to repeat that mistake!)
However the Australian government does have a history of intervention in struggling sectors – just think of handouts to domestic carmakers or the guarantee on bank deposits.
Despite that, I feel that the case against active intervention is stronger, and doubt we will see the government stepping in any time soon.
Until then it continues to be a dog-eat-dog world, and I advise readers to look for better investment opportunities.
