China’s new iron ore buyer sets off biggest shakeup in years

CMRG has already begun discussing supply contracts with top producers Rio Tinto Group, Vale SA and BHP Group, said the people, who asked not to be identified discussing private information.

The move to consolidate buying for China’s massive steel industry will give CMRG unprecedented negotiating power in iron ore, and the new company plans to seek discounts to prevailing market prices. It’s the latest in a number of attempts by China, the No. 1 buyer of almost every major commodity, to increase its influence over global markets and pricing.

Representatives from the major iron ore miners were informed of the changes by Chinese officials in recent meetings. The current structure for “term” supply contracts — in which steelmakers place orders on a quarterly basis and use a spot index for pricing — is expected to continue, with CMRG taking over responsibility for certain contracts to begin with, said the people.

Iron ore futures slumped as much as 3.9% in Singapore on Friday, the biggest drop this month.

Multiple attempts to seek comment from CMRG were unsuccessful. Baoshan Iron & Steel Co., the listed unit of Baowu, did not respond to an emailed query. BHP and Rio declined to comment. Vale has been working closely with CMRG and sees an opportunity to strengthen its relationship with China in this new context, the company wrote in an emailed response. “We see ourselves as China’s long-term partner and a reliable supplier to the Chinese steel industry of the future.”

China, which accounts for about three-quarters of the world’s iron ore imports, has long complained the mega miners hold too much power because supply is so concentrated — the top three producers control more than half of global exports.

CMRG was established in July to buy raw materials for the giant domestic steel industry, but it has been unclear how quickly it would begin operating, or how much of the industry’s purchasing would end up being centralized.

If implemented, the move to buy through CMRG will be the biggest change to the iron ore market since 2010, when producers led by BHP took advantage of a scramble for supplies to break a 40-year system of selling iron ore at a set annual price, arguing that prices should be driven by market fundamentals.

Now, the power balance has switched. Demand is stagnating, weakening the miners’ position, and the world’s biggest steelmaker is flexing its muscles. Chinese iron ore demand has fallen from a peak in 2020, and Macquarie Group Ltd. forecasts it will not return to that level within the next five years.

The recent discussions have spooked senior executives at the biggest miners, who are worried about the potential for China to increase its control over prices in their most profitable commodity.

China’s current plan is to move all term supply contracts for the leading steelmakers over time to CMRG, the people said, although the negotiations are still ongoing and the situation could change. The company will act as an agent for the steelmakers and has hired leaders and key traders from Chinese metals firms.

“The miners don’t have a choice – they have to sign up to this China-based price-setting agency, because there’s no one else out there to buy these tons,” said Tom Price, head of commodities strategy at Liberum Capital. Over time the move could push the big miners to work more closely, given that supply is so concentrated among a few producers, he said.

“Given this market’s structure, if China decides to dictate pricing terms then we should expect the miners to respond by behaving less competitively, and more strategically.”

Tensions between the top iron ore producers and their biggest buyer are nothing new.

For most of the industry’s recent history, iron ore was sold based on the annual “benchmark” price, set through lengthy negotiations between the Australian miners and Japan’s Nippon Steel Corp. and China’s Baoshan Iron & Steel Co., which the rest of the industry would use as a reference.

In 2010, under pugnacious Chief Executive Officer Marius Kloppers, BHP decided to break the system. Negotiations had become increasingly difficult and ugly, and the biggest miner was convinced it was leaving too much money on the table.

With Chinese demand roaring and supply at the time increasingly tight, the miners were able to move pricing onto a spot market, where prices jumped from about $60 a ton to $150 a ton in little more than a year. Strong iron ore prices since then — with the exception of the commodity collapse in 2015 — have helped produce eye-watering profit margins at the biggest miners.

Beijing has long pointed to a power imbalance between the clutch of global mining giants on the one hand and China’s vast but fragmented steel industry on the other. The country imports 1.1 billion tons of iron ore annually to help supply about 500 steel mills, of which the top 10 companies only contribute 40% of the national output.

There was no fanfare when CMRG was established in July, but people familiar with the matter told Bloomberg at the time that its creation was encouraged and closely monitored by top leaders in Beijing. They see a consolidated platform for buying resources as a way to strengthen the country’s negotiating position in an unfriendly international environment.

Despite that, CMRG received little global attention so far. BHP, Vale and Rio’s executives have made few public comments about the company, mostly restricted to recent posts on Chinese social media pledging to work with the new venture. Analysts and investors haven’t seemed overly interested either — it didn’t come up at all in questions during a Rio Tinto investor day last month.

The fact that iron ore supply is so concentrated may limit CMRG’s negotiating power for now, said David Lennox, a resource analyst at Sydney-based Fat Prophets.

“It will only work when there are significant supply sources available for the single buyer to play off against each other, and that is well down the track.”

(By Thomas Biesheuvel, Alfred Cang and Jack Farchy, with assistance from Mariana Durao and Liz Ng)

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