China’s Growing Influence in Iron Ore Market

After just three years since its formation, government-run traders in China have emerged as the dominant force in the $130 billion iron ore import market.

The establishment of China Mineral Resources Group Co. (CMRG) has played a significant role in stabilizing one of the most volatile commodity markets in the world. This shift has led to record low volatility in iron ore futures and is impacting how negotiations unfold with major global mining companies, which could alter the power dynamics between China’s massive steel industry and suppliers like Rio Tinto and BHP Group.

CMRG is reshaping a market that has posed challenges for Chinese leaders for the past fifteen years. Its influence becomes particularly evident when steel manufacturers either struggle or accumulate stock during price dips, although those familiar with the situation prefer to remain anonymous due to its sensitive nature.

According to Bansheeby, an analyst at Horizon Insights, “The existence of CMRG is primarily aimed at addressing the issue of over-reliance on iron ore imports.” She noted that the organization has built up iron ore inventories across more than a dozen key domestic ports.

While the Chinese government has sought to mitigate market fluctuations through local reserves and major commodities, managing iron ore has proven particularly challenging. Since it is the key raw material for China’s extensive steel industry, any price surges can pose inflation risks for Asia’s largest economy.

Since 2010, the move away from a system of negotiated contracts to floating spot fees has led Chinese officials and steel executives to lament the pricing power held by major companies such as Rio and BHP, as well as Brazilian Vale SA.

For instance, during the price surge in 2021 amid the Covid pandemic, the government took a robust stance, increasing trading costs and curbing speculative trading while pushing for inventory sales. The aim was to counter what they deemed “malicious” speculation during that time.

Shifting Dynamics

Created in 2022 under President Xi Jinping, CMRG aims to redefine China’s relationship with iron ore suppliers, taking on a mediation role as opposed to leaving the fragmented steel industry at the mercy of miners and traders.

Market participants have noted that CMRG has grown to be the largest trader of iron ore, now representing over half of China’s steel manufacturers in discussions with suppliers like Rio Tinto and BHP.

The past six months have seen unusually stable prices. The slowdown in China’s economy and decreased steel demand are key factors, but CMRG’s influence cannot be overlooked.

Joel Parsons, a portfolio manager based in Singapore, remarked, “It’s interesting to consider how much CMRG might accelerate these changes.”

Iron ore transactions occur through various methods: long-term contracts, advance shipping, or the spot market linked to daily reference prices. CMRG has been actively engaging in the spot market, with over 40 shipments reported as of June 19th, according to Bloomberg. These shipments include products from BHP and Rio.

Interestingly, Vale has opted not to pursue spot deals with CMRG, preferring to focus on long-term contracts with Chinese factories, as noted by an insider.

So far, major miners have not committed to term contracts with CMRG, according to Simon Trott, CEO of Iron Ore at Rio.

Neither CMRG, Rio, BHP, nor Vale offered any comments on the situation.

One of CMRG’s advantages is its ability to absorb losses due to its state-run status, allowing it to expand its influence while more established trading platforms stepped back.

Aurelia Waltham, an analyst at Goldman Sachs, mentioned at a recent meeting in Singapore that CMRG must “maintain prices at a level acceptable to supply and demand.” In a prior memo, the bank indicated that CMRG could potentially hold around 20 million tonnes of ore at ports based on discussions with steel factories.

This provides steel manufacturers with the comfort of a reliable and stable supplier in CMRG. However, for miners, this closer integration could undermine their negotiating power, leading to potential future conflicts over pricing.

“The unique structure of the iron ore market, characterized by a concentrated supply from low-cost producers and specific quality demands, means that while CMRG has leverage, it doesn’t hold absolute power.”