Reports that China is planning to create a single platform for buying iron ore has generated some consternation within the industry. While there is no doubt that China is constantly seeking ways to reduce its dependence on Australian iron ore its latest idea is unlikely to fly.
Alarm bells rang within the sector after Bloomberg published a report last week saying China wanted all purchases of steelmaking materials to be negotiated by a single state-backed platform. Such a platform, it said, was being developed.
China is making an effort on multiple fronts to reduce its reliance on Australian iron ore.Credit:Getty
At face value, having to negotiate with a single state-controlled buyer, rather than the myriad Chinese mills the seaborne producers now deal with individually, would shift the balance of negotiating power from the miners to China.
It would return the miners to an even more concentrated version of the pricing regime that existed more than a decade ago, when Rio Tinto, BHP and Brazil’s Vale (Fortescue wasn’t a material player back then) negotiated individual annual contracts with the biggest mills in China and Japan and were played off against each other.
Marius Kloppers completely changed the way that iron ore was priced when he forced BHP’s customers to accept market pricing of iron ore. Rio and Vale initially sat on the sidelines, continuing to set their prices via the annual negotiations, but the Chinese mills themselves convinced them to join BHP.
For more than 40 years the Japanese mills had always honoured their contracts but the Chinese mills, when spot prices fell well below their contract prices, decided to renege on their agreed deals, creating a “heads I win, tails you lose” outcome for the mills.
Confronted with such a one-sided and unpalatable relationship, Rio and Vale joined BHP and the contract system disappeared.
For more than a decade the market has reflected the fundamentals of supply and demand, with the price ranging from below $US40 a tonne to more than $US230 a tonne, depending on a balance between supply and demand that, even as Australia’s iron ore production has swelled, has largely been driven by China’s demand.
