Andrew Forrest, the iron ore outsider, now wants in

Andrew Forrest has made his name by being a thorn in the side of the big miners, but the outsider now wants to be the ultim­ate insider.

Andrew Forrest has made his name — and his fortune — by being a thorn in the side of the big miners, BHP Billiton and Rio Tinto.

His Fortescue Metals Group has come from nowhere in 2003 to establish itself as the nation’s third-biggest producer and, along the way, “Twiggy” has been full of commentary on how Rio and BHP have done their best to keep everyone else at bay.

To effectively call for a truce, as he did in Shanghai this week with his suggestion of an iron ore cartel, suggests he has got to be seriously worried about the future of his one-third-owned Fortescue. The outsider now wants to be the ultim­ate insider.

There is no doubt that pressure on Fortescue has become intense. Should iron ore continue to slide — as many suspect it will once Gina Rinehart’s $10 billion Roy Hill showpiece comes on stream later this year and as Rio and BHP march to even higher production levels — Fortescue’s position looks increasingly difficult.

Cost reductions have been made, but Fortescue is now seen as the marginal producer in the grossly over-supplied market for iron ore. Its low-quality iron ore does not help, nor does its $9bn debt pile.

According to invetment bank UBS, Rio and BHP, the Pilbara ­pioneers, can watch the iron ore price fall to about $US35 a tonne (it is currently $US55) before their operations start losing money on each shipment.

Fortescue was late to the ­Pilbara party, so its ore is inferior and needs extra processing before it can be shipped. That was OK when iron ore was comfortably over $US100 a tonne. But, says UBS, Fortescue starts to go backwards at a price of about $US57.

The plunge in iron ore prices in response to massive supply ­increases by the likes of Rio, BHP — and Fortescue itself — has put all second and third-tier miners under pressure. It has wiped more than $5 billion from Forrest’s personal stake in Fortescue alone, taking him down to his last $2bn. So he is understandably tetchy on the subject of what would be good for the iron ore price.

It is against that backdrop that Forrest made his extraordinary call for the formation of a cartel, which in this part of the world means he is now prepared to jump into bed with the old foes of Rio and BHP, the very companies he is effectively ­accusing of having smashed iron ore prices with their pursuit of growth.

It is an unbelievable change of tack from Forrest that was dressed up as a direction needed for the national good, not what was good for Fortescue. It was cynical and nonsensical in that it can’t and won’t happen.

Forrest has not got to (still) be one of Australia’s richest men by being a complete fool. But he has over-stepped the mark by calling on Rio and BHP to do something they cannot legally do.

Forrest and Fortescue, which exports all it produces, reckon no laws have been broken here on the basis that there is a carve-out from the competition law that ­allows the formation of cartels that exclusively relate to exports, as long the Australian Competition and Consumer Commission is advised of any such grand scheme.

So the ACCC’s Rod Sims can investigate away as much as he likes, according to Forrest’s view of things. And it has got to be said, Sims might be better off spending more time on the ­retailers of everything from milk to petrol.

But that does not get away from the fact that Forrest calling on Rio and BHP to join a cartel is mischievous in the extreme. Their more global footprint means they have more than the ACCC to worry about. Try the cartel-busting regulators in the US, the European Union, and China for that matter.

Forrest knows that. So was it just more of the sort of pot stirring, more tilting at windmills, that Forrest has long enjoyed when it comes to anything to do with his biggest and lower-cost competitors in the Pilbara?

But there is some method to the apparent brain snap. The more likely reason for the Shanghai slag-off is a hope, however remote, by Forrest that the federal government buys the line that a cartel would deliver higher prices, and by ­extension, increased taxable profits so that more hospitals, schools, universities, and roads, can be built.

Canberra would have only to get on the phone to Brazil — which along with the Pilbara three of Rio, BHP and Fortescue dominates the seaborne markets in iron ore — and concoct a multilateral agreement for supply constraint in which companies would “volunteer’’ to individually cap their production to preserve the health of their ­respective iron ore industries on national interest grounds.

It has been done before in ­aluminium back in 1994. Foreign minister of the Hawke-Keating era Gareth Evans helped get it across the line with the governments of the US, Russia, Norway, Canada and Australia — all of which were worried about the future of their aluminium industries following the collapse of the Soviet Union.

About 3 million tonnes of ­aluminium production was cut in voluntary but co-ordinated production restraint — the very sort of stuff Forrest would like to see happen in iron ore. But that presupposes that Rio and BHP would be on board.

They would not be and have no need to be, given that unlike Fortescue, their iron ore operations remain highly profitable.

But to Forrest’s way of thinking, at least he has exposed an ­avenue under which political pressure could be brought to bear on Rio and BHP to cap ­production.