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Why Fortescue Metals' Call For A Cap On Iron Ore Production Will Never Be Heeded By Other Majors

Mar. 27, 2015 8:04 AM ET
Seeking Alpha

Iron ore prices recently fell to a record low.

Fortescue Metals, the fourth-largest miner, has called for other majors to cap production and reverse the slump.

Capping production will be doing the opposite of major miners' strategy of increasing supplies to drive out high-cost miners.

The Rio Tinto chief has already rejected the call from Fortescue.

Recently, Fortescue Metals Group (OTCQX:FSUGY) called other major iron ore miners to cap production, in order to reverse a slump in iron ore prices. Iron ore prices have been on a downward trajectory since last year amid a slowdown in demand for the steelmaking ingredient in China and increasing supplies from majors. Iron prices recently touched a record low of $54.20 a ton. At the start of 2014, prices had been hovering around $130 a ton.

Despite the slump in prices, miners such as Rio Tinto (NYSE:RIO), BHP Billiton (NYSE:BHP) and Vale (NYSE:VALE) have been ramping up production. It helps that the production cost of these miners is significantly lower, and they can withstand a sustained period of low prices. In fact, this is miners' strategy - continue to ramp up production, even if prices fall. A sustained low-price environment will result in high-cost mines in China and Australia shutting down. And when that happens, the majors will be in a position to win market share. By the time the market has fundamentally balanced, the majors expect to gain significant market share at the expense of high-cost miners.

In 2014, Vale, the world's largest iron ore producer, had iron ore production of 319.22 million tons - a record, and up 6.5% from 2013. The 2014 production was even above the company's own guidance. Rio Tinto also set iron ore production record in 2014. For the six-month period ended December 31, 2014, BHP reported a 16% increase in iron ore production to a record 113 million tons. The company has kept its guidance for the fiscal year ending June 30, 2015 unchanged at 225 million tons.