Barnett's futile attack on BHP and Rio

Accusing BHP and Rio of collusion is a desperate move by WA Premier Colin Barnett, and it won't help repair the hole in the state budget.

Desperate men do desperate things, and Colin Barnett is becoming increasingly desperate. He’s trying his damnedest to pin a big fat target on the backs of our major miners, but there’s not much chance of it sticking.

Barnett last night accused Rio Tinto and BHP Billiton of "acting seemingly in a concert way" by flooding the market with iron ore to drive the price down so they can gain market share. Barnett perhaps needs a lesson in competition law. Yes, both miners are in the midst of aggressive expansion drives, resulting in increasing supply in the market and keeping a lid on the price, but that’s a commercial decision they’re entitled to make as individual companies.

Barnett’s frustration is palpable, if a little disturbing. He’s also sending a very clear message to the regulators that they need to take a closer look at these mining giants.

"They operate in a global market where there are powerful regulators,” he said in parliament.

"If I was sitting around a board table in one of those big companies, I'd be pretty nervous about what the World Trade Organisation and the European regulators would think about this.

"It's a precarious area they're going into."

While Barnett might think the miners are colluding to gain market share, he hasn’t got much hope of proving it.

For a start, our cartel laws specifically focus on preventing, restricting or limiting production or capacity or supply, since one way to regulate price is to regulate supply. That’s not what’s happening here.

What’s more, misuse of market power would be difficult to prove, since the action taken by BHP and Rio is a realistic competitive response in an intensely competitive environment.

Of course, any agreement between competitors to regulate the terms on the quantity of product they bring into the market would raise competition concerns. But the fact is they have aligned incentives to increase supply, so they actually don’t need to make an agreement. It’s in both of their interests to bring prices down low enough so the smaller players exit and because of this they will make their pricing decisions unilaterally. And unilateral decisions wouldn’t be classed as illegal.

Barnett’s big problem is the WA budget has taken a huge hit this year on the back of the tumbling iron ore price. Royalties from iron ore make up 20 per cent of the WA government's income. Right now he must be looking at the Treasury forecasts for iron ore and wondering how he got it so wrong.

For 2014, the WA government predicted an iron ore price of $US122 a tonne. In fact it went below that right at the start of the year and has been in freefall ever since. It’s now sitting just above $US80 a tonne, leaving Barnett scrabbling around looking for ways to plug the $1.5 billion shortfall in the state budget.

A better question would be how he didn’t see the price drop coming, given the mining investment boom. Or why it didn’t click with him back in April when he was singing BHP’s praises for opening its Jimblebar mine earlier than expected. Our miners are now getting the raw material out of the ground faster than ever, so the laws of supply and demand dictate that a surge in supply would drive prices lower. BHP and Rio’s actions are a nightmare for smaller producers, but that doesn’t make them illegal.

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