Organisation of iron ore exporting countries (OIOEC)

by

Australia, Brazil and India completely dominate the export of iron ore in seaborne trade.  In a market of about 750 million tonnes, Australia have about 40% of market share each and India has about 13%.  You might think that these countries would cooperate to capture the surplus from rising iron ore prices and volumes.

India has an export tax or 15%.  Brazil was considering an export tax earlier this year, but as far as I know they have not imposed one yet.  Instead of the failed RSPT, why didn’t the Rudd Government just impose an export tax and at the same time collude with Brazil and India to have them impose a similar tax.  And then increase or decrease export taxes in unison to achieve the optimal extraction of rents from the market.

On current expansion plans Australia will be exporting about 700 million tonnes of iron ore by 2018.  The spot price of iron is about $100 per tonne (having fallen from $180 earlier this year) and the average total cost of extraction is about $35 per tonne.  A $20 per tonne tax would raise over $10 billion per year of extra taxes.

With the cooperation of Brazil and India, a much, much higher tax might be sustainable.  It depends on the long term price elasticity of iron ore, of course.  I don’t have an estimate of elasticity, but I suspect the market is inelastic because of the shortage of high quality iron ore outside of Australia, Brazil and India.

If the three countries formed an Organisation of Iron Ore Exporting Countries (OIOEC) it would initially be met with fury from iron ore importers, especially China, but eventually it would be accepted, just as OPEC is accepted.  The three countries could have a clandestine agreement, but I am not sure that could survive the open political process in Australia.  Better to have an explicit, open agreement of collusion between India, Brazil and Australia.  OIOEC would have to be structured in such a way that it did not run afoul of our WTO membership.  That just means it would have to be a loose understanding between the countries rather than a formal agreement, but that could be arranged.

An export tax would reduce overall investment and production in iron ore in Australia.  But, that is what you want as a monopolist; to restrict output to drive up the price.  Since the economy is capacity constrained, deadweight losses on the Australian side would be moderate.

It seems to me that the RSPT was ridiculously convoluted.  The new agreement will raise much less tax because of the market value provision for calculating a reasonable on assets.  It is better to keep it simple and take a whole market approach to rent extraction by colluding with the other producers.  If we don’t do that we will be leaving of a lot of money on the table over the next 30 years.  Let’s say that global trade averages a 1.5 billion tonnes per year for 30 years and rent extraction is $45 per tonne with effective collusion between Brazil, India and Australia.  There might $2 trillion, to be divided between those countries.  That is the big prize that we should go after.

4 Responses to "Organisation of iron ore exporting countries (OIOEC)"
  1. Great idea (as long as the supply iron ore is inelastic). But for libs in opposition (as opposed to in govt.) i could also see them supporting this.

  2. “deadweight losses on the Australian side would be moderate.”
     
    But creating deadweight losses in China et al. is okay, is it?
    I’m tickled by the insight, Sam, but I have trouble supporting the extraction of monopoly rents just because we’d be the ones getting them.

%d bloggers like this:
PageLines