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A close-up of the iron ore pellets used in the prduction of steel.

Glenn Lowson/The Globe and Mail

The world's biggest iron ore miners are right to press on with expansions into an oversupplied market as reining in supply growth would hurt efficiency and be hard to co-ordinate, according to Goldman Sachs Group Inc.

"Efforts to support prices via voluntary production cuts would be counterproductive," analyst Christian Lelong wrote in a report on Wednesday. While such cutbacks are appealing in theory, any such proposal is misguided, according to Mr. Lelong.

This year's drop in prices to a decade-low spurred by the expansion of low-cost supply from BHP Billiton Ltd., Rio Tinto Group and Vale SA prompted criticism from rivals including Fortescue Metals Group Ltd., as well as political leaders. Glencore PLC chief executive officer Ivan Glasenberg said this month that oversupplying markets regardless of demand was damaging the industry's credibility. The critique has been rejected by BHP Billiton and Rio.

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"First, production cuts would go against the prevailing trend of improving efficiency," Mr. Lelong wrote. "Second, the required co-ordination among dominant producers with different incentives would be more difficult to achieve among three companies; successful cartels in oil and potash have featured only one or two dominant producers."

As so-called Tier 2 iron ore producers have as much as 100 million tonnes of capacity to commission in the next couple of years, the majors would have to stomach further supply cuts to support prices over the medium term, Goldman said.

"Seaborne demand is likely to peak in 2016 and the iron ore market is becoming a zero-sum game," Mr. Lelong said. "We expect the war of attrition will continue while prices gradually decline toward our $40 [U.S.] a tonne" forecast by 2017, he wrote.

Ore with 62-per-cent content delivered to Qingdao rose 0.5 per cent to $63.10 a dry tonne on Wednesday, according to Metal Bulletin Ltd. While the price jumped 34 per cent since reaching a decade-low of $47.08 on April 2, it remains 67 per cent below a record set in 2011.

BHP rejected the idea of holding back output this month. The company's performance is dependent on being the most efficient producer, not on restraining supply, Alan Chirgwin, vice-president of iron ore marketing, told a conference in Singapore, saying that BHP is operating in an economically rational way.

Among critics is Colin Barnett, the Premier of Western Australia, where BHP and Rio operate mines in the ore-rich Pilbara. The biggest miners should slow their expansions, as the signal there will be ever-increasing amounts of ore available even at lower prices is wrong, Mr. Barnett said in April.

Whether or not big producers shut capacity is the industry's top debate right now, said Luis Nepomuceno, a partner at Belo Horizonte, Brazil-based consulting firm LCN Mining and Metals.

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"The smaller producers already shut their doors," he said. "Vale and the Australian producers take prices from the market. Nobody is supporting this situation."

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