By WANG Yong
A new state-owned company will give steel makers a better say in front of foreign miners. China Mineral Resources Group, launched on July 25, will consolidate the country’s massive purchasing power to secure mineral resources, increasingly urgent amid supply-chain disruptions and geopolitical tensions.
China imports 80 percent of its iron and is the biggest consumer in the world. Individual steel makers who negotiate their own contracts have seen losses increase losses due to weak bargaining power. The top ten steel makers in China contribute only 40 percent of total steel production, while the “big four” – Vale, Rio Tinto, BHP and Fortescue – supply about half of the world's iron ore.
Overseas influence
Centralized purchasing will give the industry more power in negotiations. The new company is purely state-owned and state-run. The China Mineral Resources Group will trade minerals such as copper and lithium once the iron ore business is up and running.
Not much has been disclosed about how China Mineral Resources Group will consolidate market power, specifically, whether it will take over existing mines or importers. YAO Lin, chairman of the group, said during a visit to Dalian Commodity Exchange that all parties should support a robust pricing mechanism.
An industry insider who asked to be anonymous said that instead of acquiring operating mines from other state-owned companies, it may take over overseas projects that are still under development but have encountered financial difficulties. Business news outlet Caixin reported that the group may acquire shares in a mine in Guinea from Aluminum Corporation of China. The financing of the project was until recently deadlocked. The industry believes it will also take over mines and steel recycling businesses inside China.
An impending monopoly?
In the short run, revenue will come from iron ore trading. Currently, a handful of importers serve as middlemen between foreign miners and domestic steel plants. The group will probably consolidate its channels and resources.
In the long run, it may expand to other areas of the steel industry. The company is registered for a wide array of services including financing, ore processing, and mining project management.
It is unclear how China Mineral Resources Group and the big four will interact. China took 75 percent of Australia’s iron ore production and 67 percent of Brazil’s last year. Whoever consolidates the purchasing power will completely unsettle the current market dynamic. Foreign miners have been dealing with individual importers on an open market basis, and may not be willing to immediately sever existing relationships to work with a new player that one day will become a monopoly.
In a response to Jiemian News, Vale said it needs more information on how China Mineral Resources Group will operate but is open to discussing potential business relationships. Rio Tinto said it hasn’t been in contact with the group.
The relationship between the group and other importers is also an open one. “The new company will find it hard to compete with existing players directly. But if the government intervenes and asks its competitors to close up shop, it’s against the spirit of an open market,” a person familiar with the industry said.
But is it fair?
At such an early stage, the degree to which purchases are to be consolidated is uncertain. Implementation details such as what deals are included will also change over time.
For the hundreds of steel plants, the key questions are whether it will be cheaper to buy from China Mineral Resources Group than their current suppliers and if so, by how much.
Some are concerned about whether the new company will meet each buyer’s specific needs, or whether state-owned steel makers will be treated favorably.
