Inside Beijing's bid to tame the global iron ore market
BHP CEO Mike Henry told Canada's CTV in late December that negotiations with Chinese customers were continuing.
SEATTLE (Scrap Monster): China's state iron ore buyer is using increasingly hardball tactics against mining giants such as BHP to tighten its grip on the $132 billion seaborne market and extract better terms for steel mills, just as a giant new source of supply is set to strengthen its hand.
China Mineral Resources Group (CMRG) in November asked its steel mills and traders not to buy spot cargoes of a second BHP product, months after it blacklisted a first that drew concern from top supplier Australia's prime minister.
The standoff over a deal for next year's supply marked an escalation because CMRG had not previously banned multiple products from a single supplier, traders and analysts said.
That underscores how far the three-year-old buyer is willing to go to wrest better terms for China's steel industry.
The deal under negotiation will account for the lion's share of production from BHP's mines in Australia's northwest, and around a fifth of China's needs.
Reuters' interviews with more than three dozen steel and mining executives, traders and analysts suggest CMRG has become more assertive, but found limited success. Some steelmakers have privately complained it has not delivered the better prices or contract terms they were seeking.
Still, CMRG's tactics with BHP could set a precedent for deals with Rio Tinto, Fortescue and Brazil's Vale, said RBC analyst Kaan Peker in Sydney, as China looks to cut into the 80% margins the iron ore miners have historically enjoyed.
While refining its strategy, CMRG has enjoyed some wins and made some missteps.
In a previously unreported move, the Chinese buyer extracted a $1 per metric ton freight-linked discount on certain large cargo ships from Rio last year, said three sources with knowledge of the matter.
CMRG also became the only authorised Chinese seller of iron ore from billionaire Gina Rinehart’s Hancock Prospecting, a source familiar with the matter said, after a protracted standoff in which mills and traders said they were pressured not to buy Roy Hill MB fines on the spot market for more than a year.
But in executing the strategy, CMRG made life more difficult for its own steelmakers. It targeted a lower-grade product that was popular during times of painfully thin margins, forcing mills to pay more to source elsewhere.
CMRG then refined its approach to choose products that would exert maximum pressure on individual miners while limiting market disruption.
Mills banned from buying BHP's Jimblebar fines in September found an easy substitute in Rio's Pilbara blend fines, several Chinese traders said.
BHP CEO Mike Henry told Canada's CTV in late December that negotiations with Chinese customers were continuing.
Hancock, Rio, Fortescue, BHP and Vale declined to comment to Reuters.
CMRG, the State-owned Assets Supervision and Administration Commission that directly supervises CMRG, the state-backed steel association and the world's biggest steelmaker, China Baowu Steel Group, did not respond to requests for comment.
Courtesy: www.reuters.com