Chinese government sponsored China Mineral Resources Group seeks to provide Chinese steel producers with bargaining power over iron ore prices

About China Mineral Resources Group (CMRG)

The Chinese government in July 2022 formally established China Mineral Resources Group (CMRG) as the central purchasing authority for iron ore imports into China. The stated aim of CMRG is to provide Chinese steel producers with increased bargaining power over iron ore prices. This is to be achieved by consolidating purchase agreements on behalf of Chinese steel mills into a single purchasing regime controlled by the Chinese government.

The price of iron ore has maintained an upward trajectory since 2016 when the commodity was priced at about US$40 per ton, to about US$133 per ton today. China is the world’s largest consumer of iron ore and absorbs about 70 percent of global production, most of which is sourced from Australia. The difficulty for China is that Australia’s three major iron ore suppliers (RIO, BHP and Fortescue) feed roughly 500 individual steel mills in China, each responsible for buying its own materials. China’s response to this highly concentrated supply side servicing a fragmented buyers’ market has been to centralise iron ore purchasing and tighten control over the market to give Chinese steel mills more bargaining power over iron ore prices.

Iron ore prices immediately fell from US$98 per ton in July 2022 when the CMRG was established to US$85 per ton in November of that year; however, the subdued price was short-lived and in early 2023 was US$128 per ton and has been above US$140 in recent months.

Ramifications for Australian iron ore producers

The evidence to date is that China’s attempt to influence the global iron ore market has not achieved the desired outcome of lower iron ore prices. This is positive for all Australian iron ore exporters, both large players like Fortescue and RIO and smaller participants like Champion Iron Limited.

The most likely explanation for the minor impact to date is that like every commodity, it is the law of supply and demand that governs the price of a commodity, and artificial means of moving prices are usually ineffective over the long-term. This is particularly the case in deep and liquid markets for essential commodities for which there is no substitute, like iron ore, that is critical to steel making and is fundamental to China’s economic growth.

China’s dependency on Australia’s iron ore is grounded in its economic growth strategy which is dependent on steel making for construction activity, and infrastructure like railways, bridges, seaports, and airports. Steel is also necessary to build war ships and submarines! China’s economic growth has been stellar over the past there decades with persistent high growth rates brought on by the burgeoning Chinese middle-class. China accounts for about a third of world economic growth and the US for about a quarter, so growth is unlikely to cease any time soon. There may be less iron ore price volatility in the years ahead as the China Mineral Resources Group has the capacity to stockpile iron ore when it is cheap and make it available to steelmakers in periods of peak demand. This action will avoid price bidding wars among steel makers which in the past has driven up iron ore prices, albeit temporarily.

Australia is fortunate that its proximity to the world’s fastest growing economy and its abundance of raw materials that are in high demand mean that iron ore prices are sustainable at elevated levels well into the future.

While the supply and demand dynamics may alter slightly over time, there is likely to be minimal direct long-term impact like structural discounts on iron ore prices for Australian producers. For these reasons, investors in Australian iron ore producers like Fortescue and Champion Iron can look forward to positive shareholder value accretion well into the future.