The only way to have a quick war is to lose it. In the boardrooms of the world’s top trio of iron ore miners, the directors have decided that they are not going to lose. Rio Tinto has announced another mine in Western Australia. Not to be outdone, BHP updated its plans to expand, to get its cost of production below that of Rio.
Meanwhile in Brazil, Vale is exploiting its weak currency and ramping up output. This mining machismo makes for a truly horrible outlook. Goldman Sachs estimates that 165m tonnes more ore will be mined next year than the market needs.
The price has already slumped to $72 a tonne, a five-year low, and since commodities swing violently around equilibrium, it won’t stop there. Citicorp’s forecast of $65 next year looks optimistic. The big boys’ plan is to force the smaller miners out of business, and since most of them are already losing money, they won’t last long.
Or will they? The biggest consumer of iron ore is China, and it’s the high-cost local miners which are supposed to close. If the price falls far enough for long enough, they will, but not before the Chinese authorities finally give up hope of an upturn.
To be fair to the big three, they have the prisoner’s dilemma. If one scrapped its expansion plans, its own cost per tonne would not fall, while the higher price would allow the other two to clean up. You can see why clever Ivan Glasenberg wanted to put us Rio shareholders out of this misery by taking the company over and stopping the producers “killing the supercycle”.
Instead, the west’s miners will hand their efficiency gains to Chinese consumers. Perhaps the maxim in those boardrooms should be: If you’re in a hole, stop digging.
A page from an early draft of the Autumn Statement has fallen into my hands
Mr Speaker, I come now to the nation’s finances.
My Treasury colleague, the chief secretary, has remarked on our deficit reduction plans for after we win the next election. He said they were “simply not credible”. This does him no credit as a member of the government.
However, today I can announce a single measure to transform the public finances.
The Bank of England’s programme of Quantitative Easing has required it to purchase £375 bn of government securities. This has enabled Britain to mitigate the effect of the recession that has so damaged our trading partners in Europe.
It is an experiment that is widely held to have worked. Today I can go further.
One result of QE is that 28 per cent of the National Debt is now owned by the Bank. The Bank itself is owned by the taxpayer. Accordingly, I have instructed it to destroy its entire stock of government securities. This will require some technical adjustments to the Bank’s balance sheet.
The move may be seen as controversial. So was that of QE itself when we embarked on it. But of course there is no question of the Bank being unable to meet its obligations as they fall due. It can print its own currency, unlike our less fortunate European neighbours.
When our economy recovers to the point where inflation is a danger, new Treasury stock can be created and sold as necessary.
As it always has been in the past.
As a result of this action, Britain’s National Debt will fall from 80 per cent of our gross national product to under 60 per cent. A lower figure than almost all our international competitors.
I turn now to our scope for tax cuts…
Who’d have thought it?
You can’t beat social science for increasing the sum of human understanding, and here are two fine examples. Bankers, according to some researchers at the University of Zurich, lie for financial gain.
Meanwhile, their colleagues across the border at the Universite de Bretagne-Sud have been amusing themselves observing the impact of women wearing high heels on the male psyche. They’ve found that we pay more attention. Coming next: research on defecating bears in woods.
This is my updated FT column from Saturday