How and why China is centralizing its billion-tonne iron ore trade

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China has embarked on one of the biggest upheavals in the global iron ore market in more than a decade. A newly created state group will be a hub for everything from huge mining investments in West Africa to purchasing steel equipment from international suppliers. It comes amid pandemic-related disruptions and growing geopolitical tensions that have highlighted threats to supply chains and made resource security a top priority for President Xi Jinping. Mining giants Rio Tinto Group, BHP Billiton and Vale SA will seek to understand exactly what China is now planning for them.

1. What is the new company?

China Mineral Resources Group was established on July 19 in Xiongan, President Xi Jinping’s green city in Hebei province, with a registered capital of 20 billion yuan ($3 billion). That puts it in the same league as China’s national oil and gas pipeline company, or state-owned aviation kingpin, Comac. The group’s mandate covers mining, ore processing and trading. Bloomberg News reported that it will manage overseas investments, including the giant Simandou project in Guinea, which China sees as crucial to reducing its dependence on Australian minerals, and ultimately become the main or only channel for purchase of ore.

The aim is to tackle what Beijing calls a power imbalance between a handful of global mining giants on the one hand and China’s vast but fragmented steel industry on the other. China imports 1.1 billion tons of iron ore a year, at a cost in 2021 of around $180 billion. There are about 500 steel mills in China, of which the top 10 enterprises contribute only 40% of national production. Each of the steel mills is responsible for purchasing its own raw materials, while the supply of iron ore is on the other hand very concentrated. By centralizing purchases, China aims to gain more leverage with suppliers on prices.

People familiar with the matter told Bloomberg that the company’s formation was encouraged and closely watched by top leaders in Beijing. They see a consolidated platform for buying resources as a way to strengthen the country’s negotiating position in a hostile international environment. Chinese leaders have repeatedly accused the United States and its allies, including Australia, of banding together to try to suppress China’s global rise. Last year, Australia was responsible for more than 60% of China’s iron ore imports, despite deteriorating relations between the two countries.

A mini “who’s who” of the Chinese mining and metallurgical industry. Yao Lin, former chairman of Aluminum Corp. of China, or Chinalco, will be chairman. The managing director is Guo Bin, executive vice president of China Baowu Steel Group Co., which, as the country’s largest steelmaker, is a huge consumer of iron ore. Others include current and former officials from Ansteel Group, MMG Ltd and the National Development and Reform Commission, China’s economic planning agency.

Since the top executives of the new company are drawn from the two major steelmakers in the country, it is expected to import iron ore on their behalf. Baowu and Ansteel jointly produce more than 230 million tonnes of steel a year and are growing by merging with rivals. This indicates that the new company will likely import at least 460 million tonnes of iron ore per year, more than 40% of China’s total. Additionally, the inclusion of Simandou gives the new group responsibility for one of the largest and most important new mines in the world, which Rio says could produce 100 million tonnes of ore a year.

6. What is the background story?

Prior to 2010, iron ore prices were set for an entire year in annual negotiations by the biggest miners and steelmakers in Europe and Asia. But the rapid expansion of Chinese demand in the early 2000s spurred the creation of a distinct spot market that was often out of step with annual prices. The annual negotiations became increasingly tense and BHP spearheaded the move to floating pricing which has been in place ever since. China’s steel industry regularly complains about the market mechanism, especially when prices are high. Beijing’s push for centralized procurement also echoes an even more distant past, when only designated trade agencies were allowed to import raw materials.

7. What do miners say?

Any attempt to reshape this trade will have ramifications for companies like BHP and Rio, which derive more than half of their revenue from iron ore. So far, however, the miners have not sounded the alarm publicly. BHP chief financial officer David Lamont told a business forum in Melbourne that his company believes markets will determine where the price should be based on supply and demand, according to The Australian. Fortescue CEO Elizabeth Gaines said her company will continue to optimize distribution channels to meet the needs of China’s steel industry. Rio Tinto declined to comment. Meanwhile, Philip Kirchlechner, director of Iron Ore Research in Perth, suggested that if a buying cartel was established, suppliers could decide to form their own cartel, like an iron ore OPEC.

8. Are there precedents in other products?

Kind of. China has more informal buying groups in certain sectors. Major state-owned oil refiners, including Sinopec, have been buying crude together for two years, collectively launching bids for some Russian and African grades. Copper smelters, including Jiangxi Copper Co., have a group that collectively negotiates commodity contracts with BHP and other miners. It has more than 10 members, representing more than 80% of imports. But that is still a long way from a separate legal entity tasked with being an intermediary for the industry.

It’s debatable, and depends on what the goals are. Channeling all of China’s iron ore imports through a single entity would be a gargantuan task. And history has shown difficulties with centralized trading, including corruption and other inefficiencies. And even if China tasked this new iron ore champion with buying for, say, three or four of the major producers, that wouldn’t necessarily have much of an impact on spot prices. Skeptics will say that supply and demand are more important.

• A deep dive into how China’s quest for iron in Guinea’s Simandou Mountains is jeopardizing a biologically rich ecosystem.

• More QuickTakes on the Sino-Australian conflict, the Quad and Aukus alliance, and China’s major pipeline projects.

• Bloomberg’s Javier Blas Opinion on an emerging steel crisis.

• A ranking of the largest steelmakers in the world.

• Bloomberg Businessweek on the billion-dollar hack that led to the Rio China crisis.

More stories like this are available at bloomberg.com

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