We have to trust the biggies like BHP, Rio and Vale who have purposely spent billions over the past few years to increase
production to meet the world's increasing demand for iron ore. The name of the game for these companies is to "make as much money they can" so one can only assume that they have got the mix of volume , price and costs right. The market tends to react to the price of iron ore in valueing these stocks rather than looking at the margins x volume.
Take a mega operation that has a capacity of producing say half a billion tons a year. The marketing manager has to decide
on what mix of price and volume makes the most money for the company. For example, if the company can produce at capacity
of half a billion ton/year with say $20/ton net margin ( $10 billion year profit) or say produce 400 million ton a year causing
upward pressure on price and yielding $25 a ton net profit. The bottom line would be similar and if all other things are equal, then why deplete resources for no extra money by producing at full capacity?.
China's investment in resources have always had oversupply in mind to moderate price and it is no surprise now that despite
China's imports of IO being up 16% ytd, they are managing to buy it at lower prices than last year.
Perhaps our IO producers should get together with with Vale and negotiate a supply deal similar to what OPEC does with oil.
If OPEC gets past the WTO, then why should an IO version of OPEC not be acceptable? If Australia and Brazil cut productoin
by say 20% it could mean $150/ton which would produce better bottom lines for BHP, RIO, Vale, FMG etc., save some
of our precious resources and share the windfall with all Australians. At present the miners say that they even can't afford
a 10% MRRT yet we allow them overproduce for little benefit to us.
I came through the Middle East a few times in the past year and one could only be impressed by the apparent wealth there from petrodollars. Why can Australia not do the same with iron-dollars or are we stupid or what? Its once in a lifetime opportunity.
Moorookamick
