China’s ‘ruthless’ threat could threaten Australian iron ore

It’s a billion dollar moneymaker for Australia, but China is making moves to interfere in the sector to try to stop huge price swings.

Warnings have been sounded over China’s threat to interfere with the iron ore market as it moves to set up a centralised platform to make sellers negotiate directly with them on prices, potentially jeopardising Australia’s billion dollar moneymaker.

China’s powerful National Development and Reform Commission is preparing a “single state-backed platform”, according to Bloomberg, to help stabilise the price of iron ore, with the news causing Australian iron ore producer’s shares to fall.

Iron ores prices also dropped to $US138 on Tuesday.

It is unclear whether the Commission would try to mandate a single buying point for iron ore. However, sources said it would look to establish a price benchmarking system to stop “spot” sales, where traders immediately buy the commodity rather than relying on a contract.

Spot sales have been targeted as China blames them for steep price rises in mid-2021, where iron ore hit a record price of $US233, and for more recent spikes in the price.

A haul truck is loaded by a digger with material from the pit at Rio Tinto Group's West Angelas iron ore mine in Pilbara, Australia. Picture: Ian Waldie/Bloomberg via Getty Images

Daily spot prices also influence longer term contract prices creating a headache for the country.

Michael Shoebridge, director of defence, strategy and national security at the Australian Strategic Policy Institute, warned China’s strategy could have chilling consequences.

He said Beijing’s assertion of control over other businesses and their CEOs, such as big tech owners like Jack Ma who co-founded Ali Baba group, alongside the cryptocurrency and online education sector, had been “rapid and ruthless”.

“So its credible they’ll intervene to stop the large numbers of Chinese steel mills from buying under current spot market conditions,” he told news.com.au.

“Then Beijing would be left dealing with a small number of major miners who have some bargaining power of their own and aren’t just price takers.”

A construction worker carries a load of steel reinforcing bars at a construction site in Shanghai, China. Picture: Kevin Lee/Bloomberg News

But iron ore marketing expert Philip Kirchlechner said any threat to Australia would only hurt China.

“Australia has been a good partner for China. We’re stable and dependable, and Australia is the only jurisdiction that has been able to increase iron ore production to match Chinese demand,” he told The Australian.

“If (China President) Xi Jinping wants the iron ore price down, he needs to encourage people to increase production. Threatening the Australian government or threatening the Australian mining industry is not going to assist that.

“Chinese companies have a lot of projects here – they should develop these projects and increase production.”

BHP began production at its $US3.6bn ($A4.98bn) South Flank iron ore mine, 56km northwest of Newman in Western Australia’s Pilbara region, in late May. Picture by: Rebecca Le May

China had already attempted a similar centralised system back in 2012, but it received little backing from major players.

Kirchlechner also warned Beijing would struggle to make Chinese steel mills stick to paying agreed prices if cheaper iron ore could be sourced elsewhere in the market.

It could also cause countries like Australia and Brazil to form an iron ore cartel as a response to any appearance that there was government interference in a market or organised collusion on the buyer’s side, added Kirchlechner.