Opinion piece published in the Australian Financial Review

The ghost of Whitlam era Resources and Energy Minister, Rex Connor is being heard again in calls for various forms of intervention in plummeting iron ore markets. Suspicious of markets, admiring of cartels and supremely confident in his ability to shape market outcomes, Rex Connor regularly derided the ‘mugs and hill-billies’ in the major mining houses.

Rex always knew better than markets (and those with real skin in the game). Or at least he thought he did.

The Whitlam Government fell before Rex’s plan to regiment, control and ultimately nationalise the mining industry using funds raised by a Pakistani money lender could be realised.  But it is worth contemplating the possible consequences of calls for a Connoresque approach to iron ore markets.

It is certainly true that the sharp drop in the iron ore price is threatening investment made during the mining boom.   It is unsettling and, in some cases, very painful but hardly surprising.  It is how markets work, whether we’re talking mining, finance, houses or tulips.

The reason why markets serve a useful economic and social purpose isn’t because all market decisions are perfect.  What most societies have learnt over time is that markets work better than the alternative, which is to have ‘one big decision-maker’ working out who does what.

This might sound obvious, but the obvious has a way of going missing in action when those with the ear of governments – and ready access to twitter – don’t like what the market is delivering.

So what is the likely outcome if Australia’s major iron ore producers wind back production plans?  It is worth remembering that Australia accounts for about a quarter of global iron ore production.  It takes a form of RFX-like arrogance to suggest that a clamp on production in one quarter of global output is a panacea for the sector.

The truth is that a voluntary ‘cap’ on production would likely have some different consequences.

First, it would be a giant free kick to Australia’s competitors.  Hard-earned Australian market share in the seaborne iron ore trade would be given up.

Export dollars that would have flowed to Australia would instead go to Brazil and other iron ore exporting nations.  And one thing we know from commodity markets is that once given up market share is very difficult to win back.

Secondly, any such move by Australian producers would effectively signal to ‘China Inc.’ that high cost production in that country can persist indefinitely.  It rarely gets mentioned in despatches, but China produces more iron ore than anywhere else. Much more.

Freeze drying higher cost Chinese iron ore production in place is a very strange way to preserve high-wage iron ore jobs in Australia.

Thirdly, any such move within Australia’s mining industry would be a terrible signal to economic policy makers and the country at large. Throwing sand in the wheels of markets only tends to lengthen and make more painful the economic adjustments needed for demand and supply to rebalance.

Moreover, for years the mining industry has taken a strong (and sometimes lonely) stance against policy interventions that distort or interfere with commercial decisions.  Think of the punitive ‘super profits’ tax, local content rules and a range of other levies and regulations.

To now say that individual miners need such intervention would have the anti-mining crowd in stitches. And one could only imagine what a future government might cook up next time there is a mining boom.

All these are plausible outcomes.  We should be cautious of sages who confidently predict the impact of a unilateral cap on Australia capping iron ore production.

One thing is for sure. Markets have a way of showing such folk up.

Today, the funeral of one of Rex Connor’s successors, Peter Walsh will be held in Perth.  Walsh first joined the Senate in 1974 and immediately joined the Caucus Resources and Energy Committee. He was horrified at what he encountered, including the ‘mumbo jumbo’ and ‘xenophobia’ that coloured Connor’s ‘monologues’ to the Committee.  As Resources Minister, and later as Finance Minister, Walsh trusted markets more than those who proclaimed they could shape them. He knew that market interventions to cushion impacts on some would always end badly.  He knew that promising false dawns was the cruellest hoax of all.  And few, before or since, have so vigorously defended the interests of Australian working men and women as Peter Walsh.  It is the Walsh approach, not the Connor version that should inform our approach to the current commodity price downturn.