Australian unions have a different concern but actually within the same framework.  They also assume Australian producers have market power and worry that foreign buyers will stop them using it.  They want go to an export licensing system to avoid foreign buyers increasing volumes and lowering prices.  

Do Australian iron ore volumes really matter that much in the world market?  A clear view on competition in the market and the way the deal affects competition helps the assessment of foreign investment propositions in the industry and their impact on the national interest.

Here is some data from UNCTAD.

These data refer to the 2007 experience but they tell a story which is relevant to the recovery.  

UNCTAD reports that in 2007 the volume of world iron trade was 822mt (which is about 50 per cent of total global output).

Who is the largest exporter of iron ore in the world?  From the current debate you’d expect to say ‘Australia’.  In 2007, and to quote UNCTAD

Brazil is now the leading exporter at 269 Mt overtaking Australia with a few million tons in spite of a falling growth rate. 

ABARE in its December issue of Australian Commodities had Australia and Brazil about roughly equal in 2008. 

Name the next three most important suppliers – UNCTAD says

Indian exports grew for the seventh consecutive year and at 94 Mt the country is the third most important exporter clearly ahead of South Africa, Canada and Russia with exports between 25 and 30 Mt each. 

ABARE expected that same ranking in 2008 with India down on 2007.

In other interesting comments, UNCTAD points to the supply response to higher prices.  It says

New iron ore mining capacity taken into operation in 2007 reached almost 130 Mt globally. 

This is a considerably higher figure than in 2006 when 70 Mt of new capacity was registered or in 2005 when only 30-40 Mt was reported. 

The total project pipeline contains more than 600 Mt of new production capacity that will come on stream between 2008 and 2010. 44 per cent of the projects are in South America, 37 per cent in Oceania and the rest are more or less evenly distributed over the remaining continents.

Have we thought of Africa as a source of supply?  The UNCTAD view is that 

Several projects have been announced in Africa and it seems that West Africa’s reappearance as an iron ore producing region is only a matter of time.

The picture is one a competitive market with a number of potential entrants ready to respond to price rises.

It is true that company market shares don’t align with country market shares, however.  There is often reference to the fact that Vale (from Brazil), BHP and Rio account for over three quarters of world seaborne trade in iron ore (compared to only about 40 per cent of world output).  So it looks like the Australians have some market power in this situation.

But Vale accounts for about half of this ‘Big Three’ share.  A merger between the other two would not change the Big Three share and there would be still be countervailing power from the Brazilians.

The ACCC in careful work on the different types of iron ore markets, including seaborne lump and fines markets, came to the same conclusion, that is:

that the proposed acquisition (BHP of RIO) would be unlikely to have the effect of substantially lessening competition in any relevant market (source) 

The ACCC took into account the possibility of the scope for explicit or implicit cooperation between the merged firm and Vale.

Regulators in the US also approved the deal, but those in the EU did not.   We don’t know what was in the EU’s ‘statement of objections’, but the regulators would have used the same data as the ACCC yet come to a different conclusions based on their comparison of risks of letting the merger proceed.

The data referred to here and the ACCC assessment indicate that the market is competitive.  In that case, letting the deal go through won’t change that and so Australia has got nothing to lose in terms of the ability to capture rents.

What about the other angle – that foreign buyers would use their power to hold down prices and/or capture resource rents, and diminish the value of the assets in that way?  A related concern is that this may be the first block in a monolith being constructed by Chinese buyers.  But it is not clear how the Chinalco deal makes this work. It would be an odd situation, not one which has been experienced in other JV arrangements in Australian resources, as industry observers point out.

And Chinalco seems an odd place for ‘China Inc’ to start to build this strategy. Chinalco isn’t buying any Australian iron ore at all.

Chinalco’s share of the Hamersley marketing JV is only 15 per cent so they can’t control prices there.  And the other shareholders at the corporate level will block any attempt to force down pricing policy from above.

Jamie Freed writing in the SMH this week spelled this out:

Chinalco representatives on the Rio Tinto board are likely to be allowed to discuss iron ore and coal but would be excluded from talks about global aluminium supply if their $US19.5 billion ($30 billion) investment pact proceeds as planned.

Apart from its planned purchase of 15 per cent of Rio’s Hamersley Iron division, Chinalco has no iron ore interests, and so it could be expected to participate in board-level discussions.

‘The less they are involved with a product, the less strength you could give to the conclusion that they are conflicted,’ a source said.

Rio has insisted that Chinalco is unlikely to gain much information about annual benchmark pricing negotiations, since those are conducted by senior managers of the iron ore division.

If there is a concern about foreign owners of Australian iron ore assets capturing real resource rents then the problem is with our resource rent taxation system, not the foreign ownership.

An attempt to capture benefits by Australia in this market through licensing would backfire badly.  A reputation for insecure or uncertain supply would cause a loss of a price premium.

The challenge now is to get the funding to keep the projects going and to be ready for the China recovery.  Stopping foreign investment in this case risks lost opportunities.

Rio may have brought these financing issues on themselves by bad boom-time choices (they were not alone in this), and Rio’s shareholders might yet come up with another solution.  BHP too might get back in the frame. But sooner rather than later Chinese finance was going to be critical to sustain capacity in this industry, and that is in the national interest.