Dryblower on abuse of market power

THERE is nothing admirable about bullies, whether in a school playground or in business, which is why Dryblower wonders when the two biggest bullies in Australian mining will become the targets of political criticism and a dose of government administered punishment.
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Staff Reporter

BHP Billiton and Rio Tinto are the bullies in question and while they undoubtedly believe that any business tactic that wins market share is a fair business tactic, what is happening today is sailing close to breaching trade practices law.

Developments last week in the iron ore sector and more events scheduled for this week could prove to be the catalyst for complaints under regulations dealing with misuse of market power.

Most non-lawyers – and that includes Blower – are probably not aware of the restrictions placed on companies that dominate a market and while BHP Billiton and Rio Tinto may argue that they do not dominate the Australian iron ore industry they certainly come close.

The event that last week tweaked interest in the misuse of market power as explained by the Australian Competition & Consumer Commission was a pair of reports about the big boys of iron ore expanding their operations.

The game of “my mine is bigger than your mine” started with someone at Rio Tinto briefing reporters working for the Fairfax Media group about plans to expand the Yandicoogina mine, followed 24 hours later by someone at BHP Billiton briefing reporters working for arch-rival News Corporation about plans to continue expanding its mines despite a falling iron ore price.

At first glance there is nothing wrong with either report because expanding a business and increasing profits is what management of every business is expected to do.

But what happened next is where a problem might be found because a number of observers, including Blower, wondered whether both companies were over-stepping the ACCC’s rules, which deal with anti-competitive behaviour.

Sharp falls in the share prices of smaller iron ore producers were an initial pointer to the problem, with companies such as Atlas Iron, Mount Gibson Mining, BC Iron, Iron Ore Holdings and Fortescue Metals Group all dropping to 12-month share price lows.

Collectively, tens (if not hundreds) of millions of dollars was wiped off the stock market value of those companies, damaging the fortunes of some of Australia’s richest people.

The fall in the share price of Iron Ore Holdings over the past month means that media magnate Kerry Stokes is about $20 million poorer.

The fall in the price of Fortescue means its chairman Andrew Forrest is about $1 billion poorer than two months ago.

Most of the damage to the wealth of those two men and other investors in iron ore can be attributed to the fall in the price of the raw material.

But the final lurch down in share prices after the Fairfax and News Corp stories was complemented by this comment in the Chanticleer column of Saturday’s Australian Financial Review newspaper:

  • “The power of an announcement is a beautiful thing because it allows Rio Tinto to send a message to anyone wanting to fund another iron ore mine operation that it can kill it, if it wants to, with supply.”

Consider that comment, admittedly from a scribbler like Blower, alongside what the ACCC has to say about misuse of market power:

  • “A business with a substantial degree of power in a market is not allowed to use this power for the purpose of eliminating or substantially damaging a competitor or to prevent a business from entering into a market. This behaviour is referred to as ‘misuse of market power’.”

For the curious reader here’s a link to the ACCC’s website and the section of its regulations dealing with market power: www.accc.gov.au/business/anti-competitive-behaviour/misuse-of-market-power#substantial-market-power – it’s pretty dry stuff but there’s a chance that a few interesting people are reading it today.

Those people are likely to include Forrest and Stokes because they appear to be in the category of competition damaged by the combination of iron ore expansion announcements, which a reasonable person such as Saturday’s Chanticleer columnist Anne Hyland has interpreted as both a promise to shareholders of Rio Tinto and BHP Billiton and a threat to rival iron ore miners.

More can be expected on the iron ore expansion front in the coming days, with BHP Billiton’s publicity shy iron ore boss Jimmy Wilson hosting a tour for investment analysts of his company’s Pilbara operations.

While he will undoubtedly be proud to show his company’s achievements there will be a lot of employees of small miners wondering whether they are about to become “collateral damage” in the rush by BHP Billiton versus Rio Tinto to snatch more market share.

At some point, especially if many more jobs are lost in the iron ore industry, what is happening may even attract the attention of government and the arm of government charged with preventing abuse of market power, the ACCC.