BHP Billiton and Rio Tinto will possibly be facing an inquiry for manipulating prices to weed out smaller competitors; Australian Prime Minister in support of the inquiry
Australian Prime Minister Tony Abbot is supporting a parliamentary inquiry into the iron ore market in the country, focusing on giants BHP Billiton Limited (ADR) (NYSE:BHP) and Rio Tinto plc (ADR) (NYSE:RIO), to get to the bottom of the price slump of the commodity. The inquiry was first proposed by Independent senator Nick Xenophon, however the motion was rejected by the Senate.
The inquiry followed allegations from the founder of Fortescue Metal Grp (OTCMKTS:FSUMF), Andrew Forrest, who said the two giants had knowingly increased production of iron ore to cause the prices to slide. Mr. Forrest said that the giants did so to weed out the smaller competitors in the market, as they could not sustain production at such price levels.
Mr. Abbot said in an interview with Sydney radio channel 2GB on Friday that finding out the reason behind the slump in the base materials’ price was important, as it was the chief export for the country which was impacted by lower prices. Moreover, the lower prices put pressure on the budgets for Western Australia and the federal government.
Mr. Xenophon had asked for a vote on Thursday, calling for the inquiry into the “predatory behavior” of the two companies. However, he postponed the vote to June 16, as he did not have enough support as of Thursday.
Treasurer Joe Hockey said that the budget was no longer taking into account iron ore prices of $180 per ton, and was now looking at prices of $48 per ton, putting pressure on the budgets. Mr. Hockey said that as a result of the low prices of the basic material, he had to write down around $90 billion in the country’s revenues over the last 18 months.
Mr. Hockey highlighted the importance of the exports of the basic material to the country, saying that on an annual basis the country exported around 550 million tons to China. To put it in perspective, he said that this was enough to build the Sydney Harbour Bridge from Sydney to Perth and back again.
The issue is seen to be extremely sensitive, as such an investigation could cause BHP Billiton stock and Rio Tinto stock to be significantly impacted, reducing value for shareholders. Mr. Abbot said: “We do need to know the facts…What we don’t want to see is predator behavior by any company.” However, he was uncertain that the investigation would take the course that was highlighted by Mr. Xenophon.
The Australian Prime Minister said in the interview: “Certainly I think we do need to know the facts of what’s going on here because I am conscious of the claims that are being made by Andrew Forrest and others.” The inquiry, when initiated, would look into regulations and taxation issues, along with the allegation of the two giants using their influence and power to drive the prices of iron ore down.
Lower House Independent Andrew Wilkie said that he was in support of the probe suggested by Mr. Xenophon, saying that the lower prices, and the subsequent detriment of jobs, had caused tax receipts for the government to fall, making it harder for it to “deliver services and payments for the broader community.” He said: “Mr Forrest has been arguing for months that BHP Billiton and Rio Tinto have been abusing their market power by over-supplying the global iron ore market, thereby driving prices down.”