China iron ore agency strikes deals but supply-demand factors still dominate pricing

China Mineral Resources Group, the nation’s new centralized buying agency for iron ore created in July 2022, has not become the market control mechanism that some had predicted. Economic factors – including within China itself, together with the weather – continue the real price setters for commodity ore.

When it was launched, CMRG’s remit was to enhance China’s iron ore supply capability and improve its iron ore pricing power, according to the official launch statement. The world’s largest steelmaker, China is more than 80% dependent on imports of the primary steelmaking ingredient, and decarbonization means steelmakers now need higher-quality, premium-priced iron ore at the most economical prices possible.

“China’s desire, as the largest importer of seaborne iron ore, to have stronger influence in pricing is understandable,” according to Will Chin, head of commodities at Singapore Exchange, which pioneered the world’s first cleared iron ore swap in 2009. China consumes 70% of the world’s seaborne iron ore – a market trading 1.5 billion mt/year.

“We look forward to working with CMRG to provide enhanced transparency in price signals reflecting the symbiotic China onshore and seaborne iron ore markets,” Chin said.

Securing those supplies means negotiations with the big four iron ore miners: Vale, Rio Tinto, BHP and Fortescue Metals Group, which, as CMRG points out in the launch statement, together control around 70% of the market. Specific supply contracts or accords have been set up between the Chinese agency and Vale as well as BHP. But there are no signs of a return to the long-term contract system that dominated the global iron ore industry for a 40-year period until 2009, when the world’s biggest steelmakers and iron ore miners indulged in annual “mating” seasons to set prices for the whole year for everybody else, too.

Spot market indicators remain very much the benchmark for the commodity-grade iron ore trade.

Spot iron ore prices broadly stabilized at lower levels in the months following CMRG’s creation, indicating that the market did feel some impact from the new player’s presence, albeit temporarily. S&P Global Commodity Insights’ key benchmark Platts IODEX 62% Fe content CFR delivered north China assessment hovered around or below $100/mt for much of H2 2022, dipping to $79.5/mt on Oct. 31 while CMRG engaged miners in supply talks. This compared with a 2022 price peak of $162.75/mt March 7 after Russia’s invasion of Ukraine had sparked supply concerns.

But supply-demand factors have subsequently come more clearly into play.

Iron ore prices rebounded in January as China’s economy shook off its COVID-19 shackles just as the rainy season curbed exports from major suppliers Brazil and Australia. On Feb. 21, the price reached an eight-month high of $131.85/mt, partly weather-related, not far off the $140/mt threshold that is understood to cause losses for Chinese steelmakers. This indicates, in fact, that CMRG is not in charge of pricing after all.

Decarbonization
What’s changing the iron ore market now is the urgent need to decarbonize, and CMRG’s creation may actually reflect that.
Steelmaking accounts on average for 9% of global carbon emissions and more in China. Using high Fe-grade, niche iron products such as direct charge blast furnace material, lump and “green” briquettes for direct reduction reduces the amount of coal steelmakers need to use in blast furnaces, cutting carbon emissions.

Indeed, CMRG’s move to reduce quality ore prices in the interests of decarbonization was defended at a recent Financial Times event in London by Menglong Li, chief researcher of the low carbon development center at China’s HBIS Group, one of the world’s biggest steelmakers, with close links to China’s Iron & Steel Association.

“We need higher grade iron ore at lower, more economic prices… and new fields of cooperation between upstream and downstream” to decarbonize, Li said.

Partnerships
Miners and blast furnace-based steelmakers now have no choice but to collaborate to produce low-carbon steel. Mills, including those linked to CMRG, don’t want only the standard 62% Fe-content fines: a new array of low-carbon products are being made available, even tailor-made, by miners for some steel mills.

Partnerships have been announced in the past two years or so as miners race to reduce their Scope 3 emissions: Vale and Anglo American have both set up pacts with Nippon Steel, BHP with JFE Steel Group, Rio Tinto with Shougang Group, while Fortescue Metals Group has teamed with Voestalpine and Primetals Technologies.

“Most of our Scope 3 emissions are from our partners in China – we’re seeing opportunities to decarbonize in steel but it requires phenomenal investments,” said Jonathan Grant, Rio Tinto’s chief adviser on climate change, speaking at a recent Natural Resources Forum in London. The miner has estimated its decarbonization may require investments of $7 billion, hence the importance of relationships with its customers.

“We’ve got long-standing and mutually beneficial relationships with our Chinese customers and that includes CMRG,” a BHP spokesperson said.

Vale has said that it sees a memorandum of understanding signed with the new agency “as an opportunity to strengthen” relationships with China “in a new context.”

“We respect China’s intention to stabilize supplies of mineral resources for its continued economic growth,” it added.

An executive source close to the Brazilian miner said negotiations on a return to long-term supply contracts for some products have occurred with the Chinese agency, which represents around 20 of the country’s biggest steelmakers. This could result in a “win-win” situation for both miners and steelmakers, the source said.

Transparency
Brazilian miner Cedro Mineracao believes the transparency that has come with spot market pricing won’t be lost even if new partnerships between mills and miners gain more weight.

“If the market is transparent on both sides, the fact there’s just one demand-side negotiator won’t alter average market prices,” said Cedro’s president, Jose Carlos Martins. However, sales practices could change if the new agency doesn’t also stimulate high-quality ore production, he said, adding that shortages of a particular product could encourage miners to return to selling on an FOB basis from the port of origin, instead of C&F delivered China, typical of the spot market.

“Nobody’s going to send ore to China to sell at a price defined by the Chinese government,” Martins maintains.