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  • EDITORIAL: Mining in a freemarket

    2018 - 07.28


    FREE markets are supposed to be virtuous by definition. The unfettered interaction of supply and demand theoretically leads to a fair market price that meets the needs of buyers and sellers alike.

    But the picture often becomes more complicated, especially when one or two big players achieve market dominance. This is often the way markets mature, perhaps particularly in Australia.

    Is it right, for example, if dominant retailers use their power to crush the profit margins of the businesses that put products on their shop shelves? That’s a free market at work, but most people wouldn’t agree that it’s reasonable.

    What if big airlines dropped fares when a new competitor appeared, then lifted them again when that competitor went broke? Again, a free market in action, but a poor result for consumers.

    What if a big media owner skewed news reporting to favour parties or politicians that made decisions that suited that owner? If that ever happened it would probably not be a good result, despite the ostensibly free market.

    Competition is the key to making free markets virtuous. Insufficiently competitive markets slump into lazy, complacent or voraciously profiteering monopolies and oligopolies, in the worst case becoming perceived as ‘‘too big to fail’’. At this point, market players with dangerously inflated influence can menace the operation of democracy as well as distort economies to further suit their own interests.

    In that context it is interesting to hear embattled Australian iron ore tycoon Andrew Forrest suggest that he and other producers agree to cap production in order to maintain prices and profits.

    His goal is self-preservation. His company, Fortescue, is more vulnerable to the slipping world iron ore price than his giant competitors, notably Rio Tinto, BHP and Vale.

    For months, those giant players have been accused of deliberately ramping up supply in the face of slipping prices in order to seize market share and possibly drive smaller competitors – perhaps including Fortescue – out of business.

    Interestingly, the Australian Competition and Consumer Commission has seized on Mr Forrest’s remarks, suggesting he may have broken the law against potential cartel behaviour.

    That’s a fair point, but Mr Forrest insists there’s a bigger picture for Australia. He has accused his giant competitors of ‘‘smashing the revenues of their host nation’’ and their shareholders in pursuit of ‘‘market share at any cost’’.

    Is this, perhaps, a case where a ‘‘free market’’ in the iron ore sector may be producing poor results for all but the dominant suppliers?

    Mr Forrest has a vested interest in believing that to be so, but that doesn’t mean he is necessarily wrong.

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