Potential Strike at Australia’s Port Hedland Could Bolster Iron

The strike comes on the back of the Maritime Union of Australia’s (MUA) demands that workers receive an additional four weeks of leave and a 40-percent wage increase over four years. Bloomberg pegs workers’ current pay at AU$140,000 per year, while Reuters notes that they rotate regularly between four weeks of 12-hour days and four weeks off.

Engineers and masters of tugboats at Port Hedland are also looking to pressure Teekay Shipping Australia, which is charged with operating tugboats at the port, for more pay. Business Day states that the shipping company is under contract with BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) to run the port.

Long-term turnaround or short-term fling?

Iron has seen few gains since tugboat deckhands approved a plan to strike on May 12. Yesterday, however, 62-percent ore delivered to the Chinese port of Tianjin gained 1 percent, rising to $98.50 per dry tonne after a 20-month low the day before, according to Bloomberg.

Goldman Sachs (NYSE:GS) is now projecting an iron ore surplus of 175 million tonnes in 2015, up 21 percent from its previous forecast, so any potential mitigation of a glut will hopefully continue to help prices. That said, Goldman is not confident in the strike as a defining factor. Another Bloomberg article quotes the firm as saying, “[d]isruption in Port Hedland would be costly for the producers affected and would drive a temporary price rally, but it would ultimately be washed out by global market fundamentals.” The news outlet also draws attention to the fact the the Australian dollar has already fallen in response to iron’s decline, and Seeking Alpha author Dr. Duru states that investors should duly note that fact.

Duru wrote on Tuesday that the markets did not look good for iron after prices, as they had “slipped below the psychologically important level of $100 per tonne” on Monday. However, Standard Bank analyst Melinda Moore was more optimistic after Wednesday’s gain. The London-based analyst told Bloomberg, “[a] port strike of more than three to four days would support a rally in prices. We see the latest price rout as being overdone and can envisage a price rally back toward $105 a ton.”

Fair work for fair wages?

Iron ore is Australia’s greatest-earning export and thus is key to its economy. That means striking port workers have the potential to cause significant damage. A work stoppage would also hold up a quarter of global iron ore exports, and BHP has warned that the strike would cost producers roughly $100 million a day depending on iron ore prices. A spokeswoman for the miner told Reuters, “[g]iven the current wages and conditions, we think it would be irresponsible for the MUA to take industrial action that would put a stop to one of Australia’s most critical national exports.”

That said, Mining Weekly reported that Jimmy Wilson, president of BHP, has responded to strike threats by pointing out that Port Hedland employees are the highest paid in the deckhand industry in Australia, emphasizing that the demands are unreasonable. “The MUA is pursuing an unacceptable high salary rise of almost 10% a year and an increase in annual leave without any link to improved productivity,” he stated.

However, Will Tracey, assistant Western Australia secretary of the MUA, told Reuters, “[w]e think this is very reasonable, given our members work 12 hours a day for 28 days straight in very tough conditions.” He pointed out that they are requesting less leave than what is standard for the shipping industry.

Hands tied

Another Reuters article states that Teekay met with the MUA in government-sponsored mediation talks on Tuesday; however, it appears no resolution has been reached yet. BHP continues to cry foul with regards to the strike action, and Business Day quotes Wilson as saying, “[t]hey are literally holding us to ransom.”

Business Day notes that BHP has said it will likely ask the government to intervene to stop strike action, and Fortescue Metals Group (ASX:FMG), another major iron miner that uses the port, has made similar statements. Fortescue Metals Chief Executive Nev Power told Reuters,”[w]e want to ensure the dispute does not impact our day-to-day operations and we are reviewing all options available to us to mitigate any potential impact on our business going forward.”

Teekay is set to negotiate with the tugboat workers’ union again in June.

Securities Disclosure: I, Teresa Matich, hold no investment interest in any companies mentioned.