Prime Minister Tony Abbott has strongly indicated he is in favour of holding a "fair and square" inquiry into the iron ore industry, a proposal that has divided federal Cabinet, with two ministers fearing it will damage Australia's international trade prospects.

Fortescue Metals Group chairman Andrew Forrest is leading the charge for an inquiry, claiming the big two miners — BHP Billiton and Rio Tinto — are flooding the market with ore to cut the price and drive smaller miners out of business.

The cause was taken up by independent senator Nick Xenophon, who has been negotiating with Treasurer Joe Hockey for a joint House-Senate select committee inquiry, led by a Liberal MP.

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If it went ahead in that form, it could be read as giving government endorsement to the probe.

The ABC understands that possibility deeply worries both Trade Minister Andrew Robb and Industry Minister Ian Macfarlane, who believe it will send a damaging signal to trading partners that the Government is considering regulating the market.

Mr Robb declined to publicly reveal his views, saying he had shared them with the Prime Minister and was waiting for a decision to be made in "the next week or so".

But he defended the mining industry and its role in bolstering Australia's economy.

"The industry understands how to make a profit," he told AM.

"For the last 10 or 12 years we've ridden on the back of the mining sector, it got us through the global financial crisis."

Mr Abbott said it was important to get to the bottom of the "claims and counter-claims".

"I think it's important to get to the facts — an inquiry may well be a very good way of doing that," he said.

"If we are going to have an inquiry it's got to be a fair inquiry, it can't be a witch-hunt, it can't be directed against any particular company or companies.

"It's got to be fair-and-square and reasonable."

Finance Minister Mathias Cormann, who is from the iron ore-rich state of Western Australia, has also backed a "sensible" inquiry.

"Given how important this industry is for us, and given the global scale of this industry, whatever inquiry does take place has got to be handled maturely in a responsible fashion," he said.

The inquiry idea has yet to be debated by Cabinet.

If it goes ahead, it also threatens to start a damaging fight with two of the most powerful companies in Australia.

Andrew Harding, chief executive of iron ore for Rio Tinto, said Australia should be mindful of the signal an inquiry would send to its major trading partners.

"Australia has been a global champion of free trade and open markets," he said.

"These have underpinned our economic development. We should be careful not to disturb this hard-earned reputation.

"Our global standing as a supporter of open markets has already been undermined by calls to cap iron ore production and for government intervention in the market."

Fortescue's chief financial officer Stephen Pearce said the company had been talking to MPs about an inquiry and believed it was urgent.

He did not think it sent a signal that his company did not support free markets.

"There's people that are losing their jobs last week, there's people losing their jobs next week because of the state of the iron ore industry," Mr Pearce said.

"And all we really want to do is ask the questions. Is iron ore being sold for a fair price? Are royalties being paid on a fair basis?"

The collapse in the iron ore price has punched a huge hole in the both the Australian and West Australian budgets.

Inquiry would provide understanding of price: Hockey

Asked about the inquiry on the ABC's Insiders program, the Treasurer said it was not aimed at BHP and Rio Tinto.

"They're huge taxpayers," Mr Hockey said.

"And they're enormous contributors to Australia and they're big employers and we are not anti-Australian.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 15 minutes 48 seconds 15 m Treasurer Joe Hockey said the inquiry was not aimed at big mining companies.

"This is about providing a better understanding, if it is to proceed ... of how iron ore prices are determined in the global marketplace, about the competition from Brazil, about future demand out of China, but not just China, potentially India and a range of other jurisdictions.

"Given we supply around 60 per cent of the sea-borne iron ore in the world and we produce, as I said in my budget speech, enough iron ore to build the Sydney Harbour Bridge from Sydney to Perth and back to Sydney every year, I think we've got a lot at stake here and I think we should have absolute transparency."

The Prime Minister backed the Treasurer, saying his Government did not interfere in free markets but he believed it was important to get facts on the industry.

"We're not in the business of holding them back," Mr Abbott said.

"We're not in the business of holding their hands. They don't need to have their hands held.

"They certainly don't want to be held back and this Government will certainly never do that.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Listen Duration: 3 minutes 51 seconds 3 m 51 s Listen to Peta Donald's report Download 7.1 MB

"The important thing is that we have a dynamic, creative, productive iron ore industry for the future.

"We are by far the world's largest exporter of iron ore. Iron ore is an incredibly important commodity for this country and for the wider world.

"So we want to ensure that the market is operating as it should. Now I don't come to this with any preconceptions, I don't come to this with heroes and villains. I support all of the great Australian companies that are active in this field."

Labor cautious over support for inquiry

Shadow treasurer Chris Bowen said the Prime Minister appeared to be backing an inquiry while the Treasurer was equivocating.

"If there is a Parliamentary inquiry, that's obviously something Labor would facilitate and participate in," he said.

"But the Government needs to come to a decision about they support one or not."

Senior Opposition figures, including WA-based resources spokesman Gary Gray, have said Labor would be happy to take part in an inquiry, however this morning Opposition Leader Bill Shorten sounded a note of caution.

"I'm very wary of the Government playing politics and damaging the reputation of Australia's mining industry overseas," he said.

Former resources minister Martin Ferguson said the Government needs to be "very careful" about launching an inquiry and should focus on increasing competitiveness.

Mr Ferguson now works for an oil and gas lobby group and said Australia cannot be seen to be interfering with the market.

"Perhaps they should be working with the Government about how they can further cooperate to reduce our cost of production ... in terms of environmental approvals ... further industrial relations reform, consideration of our coastal shipping policy," he told The Business.

"If we now send a message to China that we're going to try and manipulate the market to reduce production to increase price we'll get crippled in the international market."

The Minerals Council's Brendan Pearson said claims that Rio Tinto and BHP Billiton were flooding the market were not borne out by the statistics.

"The market share in the seaborne market of BHP and Rio has not changed, not just for one year, not just for five years, it hasn't changed for 10 years," he said.

"So the proposition that they are flooding the market is not supported by the facts."