China takes fresh step to undermine Australia’s iron ore sector
Senior Australian resources industry figures have played down the impact of China’s move to undermine the Pilbara iron ore industry by creating a national iron ore company.
Senior resources industry figures have played down the impact of China’s move to undermine the Pilbara iron ore industry by creating a national iron ore company, amid talk the new entity is already pulling in staff to establish an iron ore trading desk servicing major Chinese steelmakers.
After weeks of rumours, Chinese authorities have formally established a new national iron ore company, tasked both with becoming a centralised iron ore buyer for China’s major steel mills, and managing state-owned investments in overseas developments such as Simandou in Guinea.
The company, China Mineral Resources Group, was established this week with a paid-up capital of $US4.3bn ($6.2bn), Bloomberg reported, as the spearhead of a push to take control of the supply chain for China’s steelmaking and other heavy industries.
The company will be headed by former Chinalco chairman Yao Lin, and Guo Bin, vice-president of China’s biggest steel group, Baowu. Some of China’s biggest steelmakers, including China Baowu, Anshan Iron and Steel and Shougang, have already agreed to buy iron ore through the company, according to Chinese publication Caixin.
But while the move is seen as a direct challenge to the influence of Australian and Brazilian iron ore miners, which reaped record profits over the past two years as the iron ore price soared, senior BHP executives played down the likely impact of the move.
Speaking at The Australian’s Strategic Business Forum in Melbourne, BHP chief financial officer David Lamont said he was not convinced the move would necessarily give China’s steel industry the ability to dictate prices to iron ore producers.
“History would say no. At the end of the day we believe that markets will sort out where prices need to be based on supply and demand,” Mr Lamont said.
“We’re supplying into that and obviously will meet what overall prices the overall economy and the world puts forward, so we’re not worried about that.”
BHP Minerals Australia boss Edgar Basto told delegates he believed the company’s relationships with its existing Chinese customers would remain.
“What is important is our focus on customer relationships in China, making sure that we deliver our quality products reliably to our customers,” Mr Basto said. “Of course, we support open markets and we have said that many, many times – but to me the focus is more on making sure that we support the industry to be competitive.”
Sources say CMRG is already moving quickly, pulling in experienced staff from resources and trading majors such as China Minmetals to build a trading desk.
But a second source with extensive contacts in China said the initial feedback from within the country’s steel industry was that CMRG could start its life in a relatively low-key fashion, focusing on buying and then blending ore from Australia and Brazil, before distributing it to major steelmakers – which would also maintain their own buying desks as CMRG slowly grew. “There might not be any major changes to the iron ore market in the short term. It’s more of a long-term strategy,” he said.
Both Rio Tinto and Fortescue Metals have already established China-based trading arms, and both are already blending iron ore into port stockpiles in the country to service smaller steel mills that would not normally buy an entire cargo of Australian ore.
Fortescue non-executive director Penny Bingham-Hall told the forum: “The Australian iron ore industry has got a new customer. I’m a great believer that markets are defined by supply and demand and China is an incredibly important market for Australia. It’s been touted for a while and it has been tried before. So I guess we’re waiting to see how it evolves.”
A Rio spokesman said the company looked forward to “engaging with the new China Mineral Resources Group, government and our customers to understand more”.
Beijing has been planning the newly established company since mid-2020 to consolidate iron ore purchasing for the sprawling industry and co-ordinate mining investments. The development is part of what the Xi administration has dubbed its “foundation plan”, an attempt to reduce its vulnerability on strategic resources.
That plan was discussed during the “Two Sessions” annual political and policy meeting in March, and is part of a decades-long effort to reduce its iron ore exposure to Australia and Brazil.
Chinese government officials have said the “foundation plan” had three parts: increasing China’s domestic production by 100 million tons of iron ore by 2025, growing China’s scrap steel industry, and developing new iron ore projects, particularly the troubled Simandou project in West Africa.
Ma Qiang, an analyst at the Beijing-based Iron and Steel Industry Research Institute, said the new company would help to “solve the problem of unequal influence” of Australian and Brazilian iron ore companies in negotiations with Chinese steel companies. China’s enormous steel industry is scattered among 500 steel mills, although the country’s top 10 steel refineries accounted for 41.5 per cent of total output in 2021.
While CMRG’s likely role in the market is not yet clear, iron ore marketing veteran Philip Kirchlechner told The Australian the impact of soaring iron ore prices in 2021 had attracted the ire of Chinese president Xi Jinping, suggesting CMRG would have considerable political muscle to back any attempt to pressure down the iron ore price.
“There’s some real power behind it. So eventually it could be like a re-emergence of the old iron ore benchmark system. And I think that this is perhaps what Xi Jinping has in mind, to be that price setter,” he said.
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