By John Kemp
LONDON Feb 26 "What we've got to do, when the
markets do get stronger, no need to keep building a new asset
and let's keep the market tight for a while," Glencore Chief
Executive Ivan Glasenberg said in remarks about overinvestment
in the mining industry.
Glasenberg's comments underlined the case for vigilant
antitrust enforcement in the mining sector.
"Not that we're here to create an anti-competitive nature,
but we've got to get returns. You the investors want to get
returns on our assets and it's easily done if we just use our
brains," the Glencore chief told investors at the BMO Capital
Markets conference in Florida, reported by Bloomberg.
"We've always been wanting to keep building and keep putting
the cash which we generate into new assets. That's what we've
got to stop doing as a mining industry. We've got to learn about
demand and supply," he said.
Glasenberg was criticising departing chief executives at BHP
Billiton, Rio Tinto and Anglo American for reacting to higher
prices by investing in too much new capacity ("Glencore's CEO
says rival mining chiefs really screwed up" Feb 26).
But his frank observations about the nature of mining
profitability confirm the need for heightened scrutiny of asset
purchases and mergers and acquisitions activity in the industry.
Given entry barriers, the incentives facing mining bosses
and their intentions are crucial.
As the Glencore chief's comments show, there may be
incentives to enjoy the benefit of limited supplies and strong
demand in the form of higher prices, rather than respond by
rushing to order new capacity.
Regulators should be on guard. The sector is already very
concentrated. Further increases in concentration should be
resisted and the industry's conduct should be subject to the
strictest form of scrutiny to ensure it continues to operate
competitively in the interests of customers as well as
Regulators have not always appeared to take potential
problems as seriously as they should. In 2008, the Australian
Competition and Consumer Commission (ACCC) decided not to object
to BHP Billiton's proposed acquisition of Rio Tinto because "the
acquisition would not be likely to substantially lessen
competition in any relevant market."
"The proposed acquisition would combine two of the three
major global seaborne suppliers of iron ore lump and iron ore
fines," ACCC observed.
Yet "while barriers to market entry are high, involving
significant sunk costs, market inquiries indicated there has
recently been significant new entry and expansion in response to
high demand for iron ore."
"The ACCC's inquiries indicated that the merged firm would
be unlikely to limit its supply of iron ore given the
uncertainty it would face in relation to the profitability of
this strategy and the risk that limiting supply would encourage
expansions by existing and new suppliers."
In the end BHP's attempt to acquire Rio fell apart because
the EU insisted on asset disposals, and the likely prices
realised for them were impaired by the escalating global banking
crisis at the end of 2008.
But the ease with which the ACCC and the EU set aside their
concerns about the market power of the major miners raised
troubling questions about the thoroughness of their review
processes and ability to safeguard competition.
NONE SO BLIND
Long lead times, significant investments in exploration,
mine development and the establishment of associated power, rail
and port infrastructure, all make pricing unstable and render
the industry vulnerable to competition concerns, as ACCC
explained in its preliminary statement of issues on the BHP/Rio
"Given the merged firm's significant portfolio of low-cost
iron ore projects and relatively high barriers to entry and
expansion, the merged firm may have the ability and incentive to
influence global supply and global prices for iron ore."
"To the extent that the merged firm could profitably time
future production and infrastructure capacity expansions so as
to maintain a global shortfall of supply," steelmakers could
face higher prices, ACCC warned.
Somehow ACCC and other regulators, including the EU, still
managed to get comfortable with the tie up, in the latter case
insisting only on limited disposals, according to sources
familiar with the review at the time.
In 2010, the question of competition cropped up again, this
time in the context of the proposed joint venture between BHP
and Rio to develop their iron ore mining interests in the
Pilbara region of Western Australia.
Somewhat sheepishly, given its earlier insouciance, the ACCC
took a tougher line. Capacity expansions it had previously
counted on had not happened. Rio and Brazil's Vale had cut
"While production cuts might reflect the large drop in
demand (owing to the global financial crisis), they might also
reflect strategic behaviour with the purpose of limiting the
decline in prices," ACCC observed. If so, it might indicate
"there are opportunities for large, low cost iron ore producers
to withhold supply."
Ultimately the proposed joint venture was abandoned and ACCC
ceased its review, but the tougher scrutiny indicated greater
unease among regulators.
Concerns about BHP and Rio centred on iron ore. But the same
issues arise in all areas of bulk mining, including thermal and
coking coal, as well as some higher-value production like copper
and are not restricted to the two big Australian miners. Long
lead times, capital intensity and the small number of firms
involved all heighten risks to competition.
Competition lawyers and consultants acting for BHP and Rio
pointed to restraining effects from potential new entrants as
well as existing competitors. In practice, barriers to entry
have remained insurmountable. Most competition has come from
within the major mining houses, in the form of capacity
It is the effects of that competition and capacity expansion
which have now been criticised by investors and Glasenberg for
cutting prices and lowering returns.
"Now we have a new generation of CEOs; I hope CEOs have
learned their lesson. They built, they didn't get the returns
for their shareholders. It's time to stop building," Glasenberg
told the conference.
The Glencore head's diagnosis is not entirely fair. Much of
the value-destruction within the industry came from ill-judged
financial acquisitions rather than capacity expansions, for
example Rio's disastrous overpayment for Alcan's aluminium
Glencore-Xstrata will be more cautious. "We will get better
returns on our investments, we will be able to kick out more
cash to our shareholders," Glasenberg promised. "We will be late
Glasenberg's comments underscore the need for continued
If necessary, regulators must be ready to take both
structural and behaviour measures to ensure the industry remains
competitive and executives have incentives to invest
appropriately and raise output, not just pocket price increases.