CHARTS: The coming critical minerals trade war is BRICS short of a load
"While a large number of countries around the world continue to talk about securing raw material supply, China is actually doing something about it."
China has embarked on one of the biggest shake-ups of the global iron-ore market in more than a decade. A newly minted state-owned group will be a hub for everything from huge mine investments in West Africa to buying the steelmaking material from international suppliers. It comes amid pandemic-related disruptions and rising geopolitical tensions that have highlighted threats to supply chains and made resource security a major focus for President Xi Jinping. Mining giants Rio Tinto Group, BHP Billiton, and Vale SA will be looking to understand exactly what China is now planning for them.
China Mineral Resources Group was established July 19 in Xiongan — President Xi Jinping’s greenfield 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 the state-owned aviation king, Comac. The group’s mandate covers mining, ore processing, and trading. Bloomberg News has reported it will manage overseas investments including the giant Simandou project in Guinea, which China sees as crucial for reducing its reliance on Australian ore, and eventually become the main or sole channel for buying ore.
The goal is to tackle what Beijing says is a power imbalance between a clutch 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 annually, at a cost in 2021 of about $180 billion. There are about 500 steel mills in China, of which the top 10 companies only contribute 40% of the national output production. Each of the individual steel plants are responsible for buying their own raw materials, while iron ore supply by contrast is highly concentrated. By centralizing purchasing, China aims to gain more clout with suppliers over pricing.
People familiar with the matter have told Bloomberg that the company’s 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. Chinese leaders have repeatedly accused the US and its allies, including Australia, of ganging up to try to suppress China’s global rise. As of last year, Australia was responsible for more than 60% of China’s imports of iron ore, despite deteriorating relations between the two countries.
A mini “who’s who” of China’s mining and metals industry. Yao Lin, former chairman of Aluminum Corp. of China, or Chinalco, will be chairman. The general manager is Guo Bin, executive vice president of China Baowu Steel Group Co., which as the country’s top steelmaker is a huge iron ore consumer. Others include current and former officials at Ansteel Group, MMG Ltd, and the National Development and Reform Commission, China’s economic planning agency.
Since the top executives of the new company came from the top two steelmakers in the country, it’s expected that it would import iron ore on their behalf. Baowu and Ansteel jointly produce over 230 million tons of steel a year and are expanding by merging with rivals. That indicates that the new company will likely import at least 460 million tons of iron ore a year, or more than 40% of the Chinese total. In addition, the inclusion of Simandou gives the new group responsibility for one of the world’s biggest and most important new mines, which Rio has estimated could produce 100 million tons of ore a year.
Prior to 2010, iron ore prices were fixed for a whole year in annual talks led by the biggest miners and the biggest steelmakers in Europe and Asia. But the rapid expansion of Chinese demand in the early 2000s spurred the creation of a separate spot market that was often way out of whack with annual prices. Annual negotiations became increasingly fraught, and BHP spearheaded the move to floating prices that’s been in place since. China’s steel industry regularly complains about the market mechanism, especially when prices are high. Beijing’s push for centralized purchasing also carries echoes of the even more distant past, when only designated trade agencies were allowed to import raw materials.
Any attempt to reshape this trade will have ramifications for companies like BHP and Rio, which get more than half their revenue from iron ore. So far, though, the miners haven’t sounded any alarm publicly. BHP Chief Financial Officer David Lamont told a business forum in Melbourne that his company believes markets will sort out where the price needs to 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 has declined to comment. Meanwhile, Philip Kirchlechner, director of Iron Ore Research in Perth, suggested that if a buying cartel were established, suppliers might decide to form a cartel of their own, like an OPEC of iron ore.
Sort of. China has more informal purchasing groups in some sectors. The big state-owned oil refiners including Sinopec have been buying crude together for two years, collectively issuing bids for certain Russian and African grades. Copper smelters including Jiangxi Copper Co., have a group that collectively negotiates raw materials contracts with BHP and other miners. It’s got more than 10 members, accounting for more than 80% of imports. But this is still well short of a separate legal entity charged with being a middle-man for the industry.
That’s debatable and depends on just what the goals are. Channeling all of China’s iron ore imports through one entity would be a gargantuan task. And history has shown difficulties with centralized trade, including corruption and other inefficiencies. And even if China charges this new iron ore champion with buying for, say, three or four of the top producers, that wouldn’t necessarily have much bearing on spot prices. Skeptics will argue supply and demand is more important.
(By Alfred Cang)
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