Matthew Stevens, 16 December 2015

The ACCC’s determined effort to sever an alliance of interest between a popular platform for petrol price discovery and the powerful retailing host that sells the stuff has taken a huge leap forward with Coles’ decision to run up the white flag and accede to the corporate cop’s demands.

The Australian Competition and Consumer Commission reckons petrol retailers have been using a subscriber data service run by Informed Sources that offers real-time insights on petrol pricing as a tool for illegal price signalling and market co-ordination.

In September 2014 the regulator set out to prove its point, opening Federal Court proceedings against Informed Sources and its subscribers. The service provided updates on pricing at a sweep of Melbourne petrol outlets on a 15-minute cycle.

Along with Informed Sources and the nation’s biggest petrol retailer, Coles, the ACCC price-fixing case named diversified retailer Woolworths and 7-Eleven, along with three integrated petrol companies, Caltex, BP and Mobil.

The arrangement received as a Faustian bargain by the regulator was that the petrol retailers would pay for a service that relied on each of them providing constantly updated information on pricing across a staggering sweep of their retail footprint.

The regulator claims that the information sharing agreement has or could substantially lessen competition.

NOTHING WRONG WITH KNOWING

The retailers argue, obviously enough, that there is nothing wrong with knowing what your competitor is doing and that all Informed Sources is doing is collecting and distributing publicly observable information in the most efficient way possible.

But the regulator didn’t (and still doesn’t) see it that way. It argues that the subscription-only pricing service is being used to price signal and it presented example after example of apparent co-ordination of price discounting and price recovery through 2009-2012 in support of its case.

In its statement of claim the ACCC observed that each subscriber delivered to Informed Sources the retail prices from a fleet of “reporting sites” on a “near contemporaneous basis” and knew that the information went to competitors with the same urgency.

The effect of the invitation-only data-sharing arrangement is that the subscribers are able to monitor the retail prices and offer real-time transparency on the pricing behaviours and strategies of their competitors.

Having information is one thing. Using it to co-ordinate markets is another. And that is exactly what the ACCC believes occurred in the Melbourne market over the three years of market activity that it documented in its statement of claim.

As you might expect, the petrol retailers were left gobsmacked by the ACCC’s view of competitive life. An army of QCs has subsequently questioned the ACCC’s understanding of the dynamics of the petrol market and wondered how knowing what a competitor was charging might be anti-competitive.

GETTING DATA TO MARKET FASTER

The accused have challenged the standing of a case built on the potential rather than reality of competition being eroded. They have made the point that the petrol retailers in the past had maintained a fleet of runners to watch and report on competitor pricing and that all that Informed Sources was doing was getting the data to market faster.

Then, for its part, the Coles legal team made the point that however fast Informed Sources worked, its data was still historical and there was nothing to suggest its service was a platform for price fixing.

But the retailers’ angry solidarity has now been smashed by the neatly fabricated agreement between Coles and regulator.

Coles has agreed not to renew its subscription to the Informed Sources data when its current agreement expires in April 2016 and offered enforceable undertakings not to provide pricing data to any similar service in the future. As a result, the regulator has discontinued proceedings against Coles, which escapes with no penalties or admissions and instead earns itself public plaudits from ACCC chairman Rod Sims.

“I welcome and appreciate the decision of Coles Express to cease using Informed Sources’ information-sharing service at the earliest available opportunity and without the need to go to court hearing,” Sims said on Wednesday. “The ACCC considers this to be an extremely positive step towards increasing competition in the petrol market, and it is pleased to see this independent initiative by Coles Express,” he added pointedly.

The chairman’s intent is plain. The ACCC’s ambition here is to end a process that patently carries the potential of anti-competitive market distortion. Given the Coles settlement stands as a precedent – and to the non-legal eye there does not seem to be a whole lot of difference between the nature or number of claims made against any and all of the ACCC’s targets – then Sims has effectively announced that the regulator is not about punishing anyone. All it wants is for real-time price sharing to stop.

Iron ore’s pain ahead

The gathering consensus that says Australia’s iron ore kings simply have to throw out the progressive dividend rule-book has been strongly reinforced by some unique and interesting research offered by the Citi resources team.

In a report essentially focused on the gathering fragility of the iron ore market, Citi observes that the dividend is a cost line all too often ignored in analysis of the all-in costs of the big miners. This, and the complication of allocation funding costs carried by the centralised treasury functions of the large miners, is something that the Pilbara’s hard-pressed but ever plucky third force, Fortescue Metals Group, has been banging on about for some time.

Fortescue’s position is that its unit cost of production, which Citi says is $US36.80 a tonne, transparently accounts for the cost of funding its nearly $7 billion of debt, along with all of the company corporate costs.

On one level, of course, it is more than fair to remove dividends from basic cost analysis because it is a payment generally viewed as discretionary outcome of the business performance.

“However,” Citi asserts, “BHP Billiton and Rio have been adamant that they will not cut their dividend and maintain their progressive policies. In effect dividends have become an additional cost that the company needs to bear, along with interest charges, op costs, royalties etc.”

So Citi has run the numbers and allocated a proportionate share of dividend maintenance to the BHP and Rio iron ore cost lines. And the result is pretty stunning.

HIGHEST-COST MAJOR

Citi estimates that allocating the dividend costs adds about $US25-30 a tonne to BHP’s iron ore costs and about $US15-20 a tonne to the Rio cost lines. Looked at through this admittedly odd prism, BHP becomes the highest-cost major, with an all-in cost of better than $US70 a tonne, while Fortescue becomes the sector leader with an all-up cost of but $US40 a tonne.

What all of this says is that neither BHP nor Rio can afford to keep paying boom-time dividends.

Citi says that “both companies would have to cut their dividend – suggesting that their shareholders will wear more pain than their competitors”.

The Citi view was published in the wake of an impressively blunt Credit Suisse report that re-rated BHP an “out perform” on the basis that the Global Australian would not ignore a share price that says the dividend is going to be cut in half.

For the record, Credit Suisse reported that the time had come to re-base the dividend and predicted “management will use the upcoming interim results to put a line in the sand and reset the investment case by revisiting the dividend policy”.

Getting back to Citi’s iron ore report, the other really fascinating point it makes is that (if we ignore the dividend issue at least) the big three of Rio, BHP and Vale, in that order, pretty much are the first and second-quartile operators on the cost curve.

ESSENTIALLY THE THIRD QUARTILE

Citi recognises FMG as “essentially the third quartile”, which means that its cost of production will probably be the floor in the iron ore price while the market remains in strong supply surplus.

“Very worryingly,” Citi notes, “this means that every other producer makes up the fourth quartile. So assets such as Kumba Iron Ore and Minas Rio (both controlled by Anglo American) are really fourth-quartile producers within the seaborne traded market.”

This is patently not great news for poor old Mark Cutifani at Anglo, given last week’s confirmation of the asset fire sale forced on a once-great mining house that has been pushed to the brink of survival by shattered commodity prices.

As one sage told me earlier this week, the only chance Anglo’s good-quality but high-cost iron ore business has of surviving the viscous price reversion under way is to write off pretty much every dollar of the investment made and run the assets for cash.

Extracted in full from the Australian Financial Review.