After this was announced iron ore future went today from $112 to $107. Just as you think somehting goes up it goes back down again.
https://www.bloomberg.com/news/articles/2022-12-16/china-s-new-state-run-iron-ore-giant-is-ready-to-start-purchases?srnd=premium-asiaChina’s New State-Run Iron Ore Giant Is Ready to Start Purchases
China is about to upend the $160 billion iron ore trade with the biggest change in years, consolidating purchases of the raw material under a single state-owned buyer as Beijing expands efforts to increase control over the natural resources needed to feed its economy.
A new state-owned company called China Mineral Resources Group is poised to become the world’s biggest iron ore buyer as soon as next year, when it will begin making purchases on behalf of about 20 of the largest Chinese steelmakers including leader China Baowu Steel Group Corp., according to people familiar with the situation.
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.
Multiple attempts seeking comments 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 email reply to Bloomberg query. “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.
Read: China Wants to Rewire Its Billion-Ton Iron Ore Trade: QuickTake
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.
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.
Read: Rio, BHP Vow to Cooperate With China’s Iron Ore Firm
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.
— With assistance by Mariana Durao
Price of Iron Ore, page-1456
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