BHP has upper hand in iron ore standoff with China as spot prices push higher

China has reportedly ordered a halt to BHP’s iron ore shipments.

When China imposed its unofficial ban on Australian coal during the post-pandemic trade war, BHP’s sales barely missed a beat.

“We’ve been selling a lot of coal to Canada,” a senior BHP executive told this columnist at the time.

Of course, those ships never got near Canada – itself a major metallurgical coal exporter. In trade’s great game, Queensland coal was “re-sold” mid-voyage and unloaded at northern Chinese ports as Canadian coal. China was happy to play along, needing to keep its steel mills running.

Even when relations were at their most frozen, China never touched iron ore. Given steel’s critical role across construction, transport and infrastructure, doing so would have crippled the economy.

BHP chief Mike Henry. Picture: Luke Marsden

This time, however, China is spoiling for a fight. It has targeted BHP, with iron ore as a bargaining chip. To be clear, this spat concerns price, not politics. China is reasserting efforts to tilt market power in its favour.

It’s a matter of who is going to blink first, and odds are it’s not going to be BHP’s hyper-experienced boss Mike Henry.

China’s state-run centralised iron ore buyer China Mineral Resources Group has in recent days reportedly told the country’s major steelmakers and traders to halt purchases of all new BHP cargoes. The move has since rattled BHP’s shares and Prime Minister Anthony Albanese has stepped in, urging a fast resolution to the issue. After all, iron ore is Australia’s biggest source of income.

The escalation between BHP and the CMRG is linked to an impasse over long-term supply contracts with China pushing for a discount given the volume it buys – about 60 per cent of Australian ore is used in the country’s blast furnaces.

This dispute will be closely watched by rival miners as the biggest test yet of China’s efforts to control a critical trading vulnerability.

Yet China may have overreached.

BHP ranks among ore’s biggest suppliers to China and, given its market power, is expected to stand firm.

Where China could pivot on metallurgical coal – abundantly available from multiple exporters – only two countries supply high-quality iron ore at scale: Australia and Brazil. Inside that duopoly, just four companies – BHP, Rio Tinto, Fortescue and Brazil’s Vale – dominate trade.

Steel plays a critical role in the Chinese economy. Picture: AFP

Each miner operates at full capacity under long-term contracts, leaving little room to replace BHP’s vast volumes.

Steel mills can’t simply switch off blast furnaces, which has forced desperate buyers to the spot market.

The already tight iron ore market has pushed spot prices higher since the dispute began, undermining CMRG’s very efforts to break the market.

This reduces options for steel mills, likely forcing them towards lower-grade ores and higher coking coal consumption – both hitting profits hard.

The timing is particularly awkward for China, where steel demand is underpinned by government infrastructure spending designed to offset a moribund property market. Any steel production slowdown will ripple through the economy, potentially stalling construction or pushing up car prices.

At the same time, a still-fluid situation on US trade tariffs means domestic exports of finished products have been ramping up, which has added to additional demand.

The CMRG was set up in 2023 with dozens of mills signing on. While it has promised to shift the power between the miners and the Chinese steel industry, analysts say the biggest impact it has had so far is removing volatility across futures markets. This has been useful for the steel mills in trying to secure longer-term pricing, but it has hardly been a re-engineering of the market.

These vulnerabilities make the BHP dispute more performative than substantive. Without a gradual backdown, the CMRG risks coming under fire from the very steel mills it seeks to represent.

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