Big boys pile pressure on smaller iron ore players

If Western Australia’s small iron ore miners thought all the bad news about falling prices was in the open, they got a shock this week when the two biggest producers, BHP Billiton and Rio Tinto, launched a war of words, complete with threats of fresh expansion programs.

While possibly taking pot shots are each other, and with more than a whiff of public relations spin in their announcements, the mine development plans of the big two will heap pressure on smaller and higher-cost miners.

What BHP Billiton and Rio Tinto did was clearly state their intentions of carving out a bigger slice of the global iron ore market because they are the low-cost producers – and because they can.

Whether further expansion of their Pilbara mines drives the iron ore price below the once unthinkable $US70 a tonne mark, is not a significant worry for companies with a total production cost of less than $US50 a tonne.

For other WA iron ore miners, including the next player in the game, Gina Rinehart and her part-owned Roy Hill mine, the tactics of BHP Billiton and Rio Tinto are as potentially damaging as they are predictable.

In a sense what’s happening is that a pair of market leaders are exerting their pricing power to crush vulnerable rivals. It’s a manoeuvre used in every industry from retail to aviation, and most commonly seen when a new rival enters the business, or when pricing power can deliver a knockout blow.

If there was anything amusing in what happened yesterday and earlier today it was the way in which BHP Billiton and Rio Tinto selected different media outlets to trumpet their plans to snatch more iron ore market share.

Yesterday was the turn of Rio Tinto, which got extensive media coverage in publications of the Fairfax group, under headlines such as: “Rio Tinto to open new mine, despite iron ore’s five-year price slump.”

Today, it was BHP Billiton’s reply in media outlets, which are part of Rupert Murdoch’s News Corporation, with headlines such as this in The Australian: “BHP presses on with WA iron ore plan despite price slide.”

Perhaps those headlines, and the accompanying stories in rival newspapers, on successive days, about similar expansion plans, by competing iron ore miners was coincidence.

But, if you believe that, then gullible should be your middle name.

The truth about what’s happening in iron ore today is that a race is on to restructure the industry with the likely result being that in a very short time WA is likely to have just four active miners, BHP Billiton, Rio Tinto, Fortescue Metals Group and Gina Rinehart.

It is also likely there will be a demarcation between those four, with BHP Billiton and Rio Tinto generating handsome (albeit reduced) profits, leaving Fortescue and Rinehart to battle for every dollar they can earn.

Small and high-cost miners, especially those stuck with the high costs of hauling ore to port by road, will be squeezed out.

This game of PR spin (the iron ore version) started with Rio Tinto feeding a story to the Fairfax media about plans to expand the Yandicoogina mine as part of a vision to eventually export 360 million tonnes of ore a year, an increase of 90 million tonnes on this year’s forecast output.

The expansion at Yandicoogina, 95 kilometres north-west of Newman, is due to come on line in 2017 with the additional material likely to be delivered at a super-low cost given that it’s a “brownfield” development rather than a high-cost new, or “greenfield” mine.

Undeterred, but perhaps annoyed, BHP Billiton’s PR machine sprang into action this morning with a story pushed the way of The Australian as a pre-emptive leak about a scheduled tour next week of investors and national media around its Pilbara mines.

That event is supposed to be a chance for BHP Billiton iron ore boss, Jimmy Wilson, to boast about his expansion plans, including the addition of another 65 million tonnes of ore, taking the company’s annual output to 290 million tonnes.

Management at both of the big miners will claim that their expansion plans will be profitable and that they are well positioned to grab increased market share as high cost ore is squeezed out.

Institutional investors, some of which are becoming annoyed by perpetual expansion plans using capital, which they would prefer to see returned to them, are unlikely to welcome the latest round of boys showing off the size of their iron ore capacity.

A backlash can already be detected in the share prices of everyone in the iron ore business, even the biggest and lowest-cost producers, because even Blind Freddie can see that the last thing the iron ore market needs today is more mines – not that this will stop the boys from BHP Billiton and Rio Tinto telling everyone in the playground that “my mine is bigger than your mine”.