Iron ore prices are swinging between optimism and pessimism over the
economic outlook in top importer China, but beyond the short-term oscillations,
a longer-term battle is looming.
China is pressing ahead with a
plan to centralize iron ore purchasing, with media reports saying state-owned
steel mills are forging a new enterprise to boost their bargaining power.
This isn’t the first time that
China, which buys about 70% of seaborne iron ore volumes, has tried to gain
greater control over the market, which moved from a long-term contract basis to
being dominated by spot purchases in a process started in 2008 by former BHP
Group boss Marius Kloppers.
BHP, the world’s third-largest
iron ore miner behind Rio Tinto RIO and Vale, is so far sanguine
about the prospect of a unified Chinese purchasing system.
Chief Financial Officer David
Lamont said on July 20 that the Australian miner remained confident the market
would set the price and the aim was to maintain good ties with Chinese
customers.
Asked if the plan to set up a
central iron ore buying enterprise was likely to succeed, Lamont said, “History
would say no.”
Lamont is probably correct in
saying that the market will ultimately set the price, irrespective of what
Chinese buyers may want to pay and what BHP, Rio, Vale, and smaller rivals want
to sell at.
The risk is that a centralized
buying system brings in inefficiencies and bureaucracy, resulting in a less
efficient market as Chinese steel mills battle to get the iron ore they need at
the right time.
It also raises the risk of a more
combative relationship between the miners and the Chinese steel mills, with
both seeking better deals than the other is prepared to offer.
Much will depend on how both
parties approach any change in how China purchases iron ore, but it’s likely
that the big three miners will seek to maintain a price linked to the spot
market.
If China effectively withdraws
from the spot market, that may complicate the issue as the reference price will
be more based on what Japanese and South Korean steel mills are paying.
In short, there is a potential
for market disruption from any new centralized Chinese purchasing system.
But even if China does set up an
effective, and efficient, centralized buying system, it’s unlikely to shift
market dynamics much.
The iron ore market is extremely
concentrated, dominated by a handful of big miners in two countries, top
exporter Australia and number two Brazil.
To put China’s dependence on
those two suppliers in perspective, seaborne iron ore imports in July are
estimated at 99.61 million tonnes by commodity consultants Kpler.
Of this, Australia is set to
supply 66.92 million tonnes for a market share of 67%, while Brazil’s share
will be 20.08 million, or 20.1%.
China’s third-largest supplier,
South Africa, clocks in with a forecast 2.6 million tonnes in July for a 2.9%
market share.
Stand-off
looms?
If China does insist on lower
prices, it will likely lead to a stand-off in which the miners restrict volumes
and the game becomes who can last the longest before blinking.
Much will also depend on the
state of Chinese steel demand at the time.
It could be argued that the spot
pricing system worked in favor of the miners in the 2009-11 period when Chinese
demand was high amid economic stimulus in the post-2008 global financial crisis
period.
But then the wave of new supply
started kicking in, and spot prices plunged, meaning Chinese steel mills were
benefiting more than they would have under the prior contract pricing system.
Iron ore prices only started
rising on a sustained basis again in 2019, dropping during the initial outbreak
of the covid-19 pandemic in 2020 before resuming their rally amid strong global
steel demand.
The spot price for benchmark 62%
ore for delivery to north China, as assessed by commodity price reporting
agency Argus, reached a record high of $235.55 a tonne in May last year and has
since trended lower, ending at $112.25 on Wednesday.
This price is still relatively
high when viewed against the last decade, and it’s probably safe to say that
Chinese steel mills would view a level below $100 a tonne as more sustainable.
But in some ways, they should be
careful what they wish for because if they defy market expectations and are
successful in driving the price down, it will likely result in lower investment
and supply in the future.
Mining.com