'Twiggy' Forrest and Fortescue Metals Group are the play things of foreign capital

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by Max O

The current capitalist crisis of over production in the iron ore mining industry has seen antagonistic rivalry take place between mining companies in Australia. The fall in demand for iron ore, particularly from China has seen its price drop from an all time high of US$185 a tonne to lows of US$40 a tonne. 

This slump in price has in particular caused Andrew 'Twiggy' Forrest's Fortescue Metals Group (FMG) consternation. However, much to the chagrin of Forrest, the two big mining giants Rio Tinto and BHP Billiton have increased their output of iron ore, even though prices are low.

Due to the fact that FMG has higher operating costs than its bigger competitors, BHP Billiton and Rio Tinto, and massive debts of $7.4bn Forrest initially called for a cap on iron ore production in Australia, to avert the fall in its price. Unfortunately for him BHP Billiton and Rio Tinto would not oblige and continued to increase their own iron ore production.

Whilst FMG has a break-even operating price of US$39 a tonne its competitors BHP Billiton and Rio Tinto have a break-even price of US$30 a tonne, with BHP Billiton planning to reduce costs further to US$16 a tonne at its WA iron ore mines. The chief method for mining corporations to reduce their costs is to cut their workforce.

Over 3000 jobs have been eliminated from the mining sector in Western Australia so far in 2015. FMG has sacked around 1000 employees and contractors.

Well, what else could Forrest do to protect FMG? He called for a Federal Government inquiry into iron ore pricing in Australia, accusing the mining giants of rigging prices and not acting in the national interest.

Who's running the country?

For a while his lobbying prowess had the 'supportive ear' of Prime Minister Abbott and Treasurer Hockey, however it was quickly slapped down by the formidable BHP Billiton and Rio Tinto colossus. This was a sure-fire demonstration of who runs the country, and its definitely not Forrest and FMG - even though FMG is touted as being the third biggest player in iron ore mining.

Forrest and FMG, indeed Gina Rinehart, are small players in the mining game, around 5%.

Until recently FMG was one of the biggest contributors to escalating the global supply of iron ore. Forrest's company had enlarged its delivery of iron ore to China far more rapidly than either BHP Billiton and Rio Tinto.

Now with Chinese demand for iron ore waning Rio Tinto and BHP Billiton, are now forced to mine as much ore as possible to operate at their maximum efficiency, as large capitalist corporations must to maintain and increase their profitability. It just happens to be at FMG's and other small mining companies' expense!

In all this rivalry between the giant “Goliaths” and the little “Davids” in the mining industry it is intriguing to see that the large nominee companies JP Morgan Chase, Citibank, HSBC, BNP Paribas and National Nominees are some of the largest shareholders of both Rio Tinto, BHP Billiton and FMG. These same large nominee companies also pop up as the largest shareholders of the "Big Four" 'Australian' banks. Nominee companies are established for the sole purpose of holding shares on behalf of other entities who want to hide their identity. They are apt to be both foreign investors and fund managers.

FMG ownership profile as of June this year is the following:

• Minderoo Group Pty Ltd 30.3% (Forrest family company)
• J P Morgan Nominees Australia Limited 10.7%
• HSBC Custody Nominees (Australia) Limited 9.6%
• Valin Investments (Singapore) Pte Ltd 7.3%
• National Nominees Limited 5.9%
• Other 36.2%

This ownership information was found at the following website:

http://markets.theaustralian.com.au/shares/FMG/fortescue-metals-group-ltd 

In the table below we see the familiar names of the nominee companies JP Morgan, HSBC, Citicorp who have their tentacles attached to Australia's largest public companies. BHP Billiton and Rio Tinto have significant cross ownership by these nominee companies.

Major shareholder of Australia's largest public companies:

	Company	Combined HSBC (Nominees)	JP Morgan Nominees	Combined Citicorp
1	AMP	19.23%	13.88%	4.6%
2	BHP Billiton	17.36%	13.29%	10.75%
3	Brambles	25.85%	21.73%	8.77%
4	CSL	24.39%	17.43%	6.1%
5	Fosters Group	23.29%	21.23%	6.31%
6	Macquarie bank	19.06%	19.96%	6.08%
7	Newcrest Mining	37.83%	16.57%	4.94%
8	Origin Energy	15.83%	14.10%	5.17%
9	Rio Tinto	19.59%	16.68%	4.89%
10	Suncorp	20.23%	17.09%	7.1%
11	Telstra	18.49%	12.5%	1.36%
12	Westfield	31.44%	25.0%	7.03%
13	Westfarmers	16.31%	13.77%	6.43%
14	Woolworths	16.50%	11.34%	4.025%
15	Woodside	16.19%	11.97%	2.25%

The next table shows these same nominee companies have significant cross ownership of the "Big Four" 'Australian' banks.

Major Shareholders in Australia's "Big Four" banks:

	Company	Combined HSBC (Nominees)	JP Morgan Nominees	Combined Citicorp
1	Commonwealth Bank	14.10%	11.13%	4.18%
2	National Bank Australia	16.94%	14.47%	3.33%
3	Westpac Bank	15.10%	12.27%	4.60%
4	ANZ Bank	18.88%	15.65%	5.41%

The ownership information from the above two tables was found at the following website:

https://independentaustralia.net/business/business-display/who-owns-corporate-australia,5033

A power shift from Western capital and nominee companies to Chinese capital?

With iron ore prices crashing it has forced FMG to slash jobs, cut costs and restructure it debt. The company in March this year failed to refinance $2.5bn worth of loans at the interest rate it wanted to secure its debt. Consequently investors exited Fortescue pushing its share value down by more than 7% to $1.83 a share, a six year low. At the time investors were definitely worried that FMG's unsuccessful efforts to refinance its debt on favourable terms meant that Fortescue might be a risky option or that the US credit markets were shutting the door to its troubles ahead.

As the stormy financial seas were about to flood FMG's deck and hold it seems the Chinese sampans might come to the rescue. The Chinese companies Baosteel and the conglomerate CITIC were reported to have held talks with Fortescue and applied to Australia's Foreign Investment Review Board (FIRB) about investing in the extremely indebted miner.

Once the speculation of Chinese investors interested in buying a stake in FMG became common knowledge its shares soared by 13.36% to $2.46 a share in late May. However, the media reported that Treasurer Hockey would "take close interest" in any investing by Chinese businesses into FMG.

Whilst Industry Minister Macfarlane recognises that “Australia is built on foreign investment and that foreign investment comes from all parts of the globe. It’s what’s built this country; it’s what’s built our resource industry,” there are definite strategic reasons for concern or to use their words "potentially any conflicts".

Hard-headed and aligned business media outlets such as Macrobusiness are quite unambiguous in their hostility to the Chinese move of securing a stake in Fortescue. Macrobusiness argues: "As the customer for 70% of global seaborne iron ore production, China has clear priorities and incentives to privilege a low iron ore price over profit generation. To allow that customer to take a big enough stake in the emerging marginal cost producer to be influential in strategy is to risk, and let’s face it deliver, a much lower long term iron ore price.

"The maths is simple. If commodity markets are left alone over the long term, the lowest marginal cost of production sets the price. However, if marginal producers are kept alive by state-sponsored life support then the oversupply can never clear and the price sinks below the lowest marginal cost.

"It is quite conceivable that a Chinese controlled FMG could force RIO and BHP to cut much cheaper and more profitable tonnages in the future, even as it runs loss after loss.

"This is a market structure issue of the highest national interest priority. At one third of exports and three quarters (with coking coal) of export income growth since 2003, iron ore is the key to the Australian economy. If the Pilbara cartel of BHP and RIO is structurally undermined so is Australia’s sovereignty, economic prospects and strategic outlook."

Straight away you can see their alignment with BHP Billiton and Rio Tinto and that what they call sovereignty is code for Australia's US/Western alliance. The outcome of FMG's debt difficulties is a possible tussle for its fortunes between China and the West.

A Chinese dragon or US eagle empire?

Back in 2009 Chinese steel maker Hunan Valin Iron and Steel Group bought a stake into Fortescue for A$636m. At the time of purchasing equity into FMG, Valin had the following portfolio: Valin Investments (Singapore) Pte Ltd, 228,007,497shares, 7.34%; Valin Resources Investments (Singapore) Pte Ltd, 154,267,590 shares, 4.97%; Valin Mining Investments (Singapore) Pte Ltd, 152,724,913 shares, 4.92%.

So even before its recent financial upheaval, FMG has had Chinese equity to the tune of 17.23%. Now if FIRB allows further Chinese interest into Fortescue to grow, and there is a pretty good chance it will be blocked, this would a have dramatic effect on the iron ore mining in Australia.

Like all imperialists the Chinese don't like to be obligated to markets for their mineral resources. Rather they want to control the process from mining through to production.

China wants secure long-term mineral supplies and is prepared to pay to make it happen. It is making sure it has equity in all global suppliers; recently it was reported that China will bankroll an enormous expansion of the Brazilian miner, Vale with its mining of low cost iron ore.

This supply of new ore would definitely compete with Australian production on cost and quality. The Chinese are playing the market and prying into the possibilities of capturing mining projects around the globe.

Currently they have enormous interest in West African iron ore projects, and they've teamed-up with Rio Tinto in Guinea. China does not want the iron ore market concentrated in the hands of the mining giants like Rio Tinto, BHP Billiton and Vale.

Fortescue exports large quantities of sub-premium ore that is important as a blending material for both China's 66% concentrates it produces locally and the Brazilian 65% concentrates that the Chinese plan to acquire from there. Therefore it has good reason to pursue a deeper involvement with FMG, irrespective of its highly leveraged financial position.

It has been noted that Fortescue is tightly welded to the Chinese steel production market system. Therefore FMG and Forrest are not only caught up in a game of markets and financial advantage but also in the deadly art of geo-politics.

The Chinese will use its developing relationship with Brazil to draw Australia out of its dependent relationship with the US and the West. Wu Xinbo, Dean of the Institute of International Studies at Fudan University has stated that “If Australia gets closer to the United States we will see China increase its purchases from Brazil, while reducing its trade with Australia… The alliance between Australia and the US is a major constraint on the relationship between China and Australia.”

Put all these latest developments of Fortescue alongside Australia's involvement and participation with the Trans Pacific Partnership and the US 'Asia Pivot' military strategy to isolate and overpower China, one can see there is a larger imperialist struggle for hegemony going on.

The rise and fall of Forrest and FMG is just one act in this highly dangerous end game.

 

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