{"id":74215,"date":"2022-08-01T14:30:48","date_gmt":"2022-08-01T04:30:48","guid":{"rendered":"https:\/\/www.aspistrategist.ru\/?p=74215"},"modified":"2022-08-01T14:30:48","modified_gmt":"2022-08-01T04:30:48","slug":"chinas-new-resource-company-could-sideline-australian-iron-ore","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/chinas-new-resource-company-could-sideline-australian-iron-ore\/","title":{"rendered":"China\u2019s new resource company could sideline Australian iron ore"},"content":{"rendered":"
<\/figure>\n

Beijing\u2019s creation of a new state-owned company to centralise China\u2019s purchases of iron ore and other metal resources is unlikely to have much impact while markets are tight and prices are high, but it could become a weapon against Australia in the event of an iron ore glut.<\/p>\n

The China Iron and Steel Association (CISA), which is the government-sanctioned body representing China\u2019s major steel companies, has long railed against what it sees as an iron ore producers\u2019 cartel and pushed for a central buying agency to counter it.<\/p>\n

The four biggest suppliers of seaborne iron ore\u2014Rio Tinto, BHP, Fortescue Metals and Brazil\u2019s Vale\u2014account for about 70% of world trade and about 80% of China\u2019s imports.<\/p>\n

China\u2019s nationalist English-language daily, the\u00a0Global Times<\/em><\/a>, said the goal was \u2018to create a centrally administered state giant to have a bigger say in ore pricing by leveraging China\u2019s strength as the world\u2019s largest consumer of iron ore\u2019.<\/p>\n

The new China Mineral Resources Group, launched last month, has been granted significant start-up capital of \u00a520 billion ($4.2 billion) and has a high-powered leadership team. Its chair is Yao Lin, outgoing chair of Aluminum Corporation of China, or Chinalco, and its operations are headed by Guo Bin, former vice president of the world\u2019s biggest steelmaker, China Baowu Steel.<\/p>\n

BHP has\u00a0responded<\/a>\u00a0sceptically to the new venture. Chief Financial Officer David Lamont noted that China\u2019s previous efforts to negotiate iron ore prices with a single voice hadn\u2019t been successful.<\/p>\n

\u2018Let me say up front, at the end of the day we believe that markets will sort out where the price needs to be based on supply and demand,\u2019 he told a business forum in Melbourne.<\/p>\n

\u2018So we\u2019re not worried about that. It\u2019s something that\u2019s been talked about for a period of time.\u2019<\/p>\n

Asked directly whether he thought the new venture would succeed, he responded, \u2018History would say no.\u2019<\/p>\n

That\u2019s a reference to the efforts of CISA in 2009 to mount a boycott of the biggest three miners\u2014BHP, Rio Tinto and Vale\u2014as it sought to impose an 82% cut to the iron ore price. The boycott was ultimately broken, first by small mills seeking to secure their supplies, and then by the majors.<\/p>\n

The head of CISA was forced out and BHP succeeded in persuading the Chinese steel industry to accept long-term contracts based on the spot price index, rather than hammered out in annual bilateral negotiations.<\/p>\n

China has a vast steel industry with about 250 large steel mills and thousands of small ones. Both CISA and successive governments have sought to consolidate the industry but with limited success. Some large mergers have raised the output share of the top 10 steel mills from 36% to 43% over the past two years, but that still leaves a highly fragmented industry.<\/p>\n

While China has been attempting to shut down its smallest and least efficient mills, the country continues to build new ones. Tracking<\/a>\u00a0by a think tank based in Finland established that 18 new blast furnaces with a capacity of 35 million tonnes (about seven times Australia\u2019s output) were approved in just the first half of 2021.<\/p>\n

Blast furnaces are critically dependent on a constant supply of iron ore and coal and face massive restart costs if they\u2019re forced to suspend operations. The problem with central buying is that smaller mills will fear that the interests of the largest mills will receive preference, and that their survival will be jeopardised if supplies are interrupted.<\/p>\n

The push for centralised buying has been a response to high prices. The iron ore price reached a record US$240 a tonne in May 2021, delivering spectacular profits to the biggest miners, whose production costs at the time were less than US$15 a tonne. Although the price has come down a long way, it\u2019s still at an enormously profitable level of around US$100 a tonne.<\/p>\n

Central buying is likely to be most effective when prices are depressed. If a glut of iron ore emerged, smaller Chinese mills would have less concern about supply security and would have an incentive to join the central agency if they believed it could deliver lower prices.<\/p>\n

China\u2019s vast steel industry will always need Australian iron ore, but a central agency could decide to favour non-Australian supplies.<\/p>\n

The Japanese steel cartel that operated from the 1960s through to the 1990s was seen to have engineered surplus supplies and was able to keep the iron ore price at levels delivering bare profitability to the miners. The iron ore price hovered between US$11 a tonne and US$14 a tonne throughout the 1990s.<\/p>\n

Although China\u2019s steel industry doesn\u2019t resemble the Japanese steel cartel, the history of bulk commodities is that they deliver flat returns, like utilities. The only reason they\u2019ve been so profitable for the past 20 years is the explosion in China\u2019s demand, which has no parallel in history.<\/p>\n

China\u2019s new resource company has also been given responsibility for increasing its supply, including the development of the large Simandou iron ore project in Guinea. The new Guinean government, which took power in a coup last year, has given the project operators until 2025 to start production. Formidable technical and political challenges remain, but the probability of the project\u2019s being realised has increased.<\/p>\n

However, the greater risk for Australia is not increased supply but a fall in Chinese demand. That may be happening now. China\u2019s steel production was down 6.5% in the first half of the year, and stocks are growing.<\/p>\n

The conventional wisdom is that a softening in the Chinese economy is bullish for iron ore because the government responds with steel-intensive infrastructure construction. Infrastructure spending is indeed rising, but its share of steel demand at around 20% to 25% is below that of the property sector at 35% to 40% and real-estate investment is in a slump.<\/p>\n

It is beyond the scope of this article to consider the broad forces at work in the Chinese economy, but a serious recession is possible, given the challenges of high debts, falling property prices, weak income growth and rising world interest rates, which are also threatening a global downturn.<\/p>\n

The China boom has been spectacular for Australia. A key economic measure is the terms of trade, which is the ratio of export prices to import prices and is measured as an index.<\/p>\n

For 50 years from the mid-1950s, that was fairly constant at around 60, but in 2005, it started rising as China\u2019s demand for resources accelerated and the cost of Australia\u2019s manufactured imports fell. By September 2011, it reached an unprecedented 120, meaning that every tonne of Australian exports was buying twice as many imports as was the case six years earlier or throughout most of Australia\u2019s history.<\/p>\n

While that sounds abstract, a return to the long-run average for the terms of trade could wipe out $250 billion of national annual income, with big implications for both government finances and Australian living standards. The China Mineral Resources Group could help make that happen.<\/p>\n","protected":false},"excerpt":{"rendered":"

Beijing\u2019s creation of a new state-owned company to centralise China\u2019s purchases of iron ore and other metal resources is unlikely to have much impact while markets are tight and prices are high, but it could …<\/p>\n","protected":false},"author":955,"featured_media":74218,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"footnotes":""},"categories":[1],"tags":[17,52,433,2746,74,365],"class_list":["post-74215","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-australia","tag-china","tag-economics","tag-iron-ore","tag-resources","tag-trade"],"acf":[],"yoast_head":"\nChina\u2019s new resource company could sideline Australian iron ore | The Strategist<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.aspistrategist.ru\/chinas-new-resource-company-could-sideline-australian-iron-ore\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"China\u2019s new resource company could sideline Australian iron ore | The Strategist\" \/>\n<meta property=\"og:description\" content=\"Beijing\u2019s creation of a new state-owned company to centralise China\u2019s purchases of iron ore and other metal resources is unlikely to have much impact while markets are tight and prices are high, but it could ...\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.aspistrategist.ru\/chinas-new-resource-company-could-sideline-australian-iron-ore\/\" \/>\n<meta property=\"og:site_name\" content=\"The Strategist\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/ASPI.org\" \/>\n<meta property=\"article:published_time\" content=\"2022-08-01T04:30:48+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.aspistrategist.ru\/wp-content\/uploads\/2022\/08\/GettyImages-531836442.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1024\" \/>\n\t<meta property=\"og:image:height\" content=\"672\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"David Uren\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@ASPI_org\" \/>\n<meta name=\"twitter:site\" content=\"@ASPI_org\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"David Uren\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"6 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.aspistrategist.ru\/#website\",\"url\":\"https:\/\/www.aspistrategist.ru\/\",\"name\":\"The Strategist\",\"description\":\"ASPI's analysis and commentary site\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.aspistrategist.ru\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-AU\"},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-AU\",\"@id\":\"https:\/\/www.aspistrategist.ru\/chinas-new-resource-company-could-sideline-australian-iron-ore\/#primaryimage\",\"url\":\"https:\/\/www.aspistrategist.ru\/wp-content\/uploads\/2022\/08\/GettyImages-531836442.jpg\",\"contentUrl\":\"https:\/\/www.aspistrategist.ru\/wp-content\/uploads\/2022\/08\/GettyImages-531836442.jpg\",\"width\":1024,\"height\":672,\"caption\":\"CHANGZHOU, CHINA - MAY 12: A worker tests the quality of molten iron at a furnace in the production area of the Zhong Tian (Zenith) Steel Group Corporation on May 12, 2016 in Changzhou, Jiangsu. 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