Iron Ore: How China is attempting to redress the imbalance of power

Securing Iron Ore

In the past week there have been a number of statements out of China, related to the challenge of China securing sustainable Iron Ore supply into the future.  These statements have been picked up by a number of international press outlets, however,  each statement has been reported as a standalone piece of policy, or action, not a concerted or strategic positioning by China and the collective entities of the Chinese Steel Mills to increase their relative power in Iron Ore price negotiations.

I argued two weeks ago in my article “Iron Ore: It’s about the Balance of Power” that the negotiation power was moving towards the Big Three major Iron Ore suppliers in Vale, Rio Tinto, and BHP Billiton, and that this was how they were able to push a majority of Steel mills to accept a move to short-term Iron Ore Pricing.  The important thing to understand with this move to short-term pricing, is that Most does not equal all steel mills. We can assume, that although Some Chinese Steel mills have accepted this move to short-term pricing (at least in the immediate future), the majority are still holding out hope that there will be a return or continuation of the year long benchmark pricing system. So how are these Chinese Steel mills going to get the big Iron Ore suppliers back to the negotiating table?

Loading the Iron Ore Boat to China

The first step has been an ongoing process by the Chinese Government, and Chinese Steel industry as a whole. This has been through investment in iron ore mining facilities around the world, to try to secure a supply of iron ore independent of the big three largest suppliers. Where has this focus been? China has been investing heavily in Iron Ore mining exploration in Africa for example through Chinalco, and this has been in a number of joint venture operations with companies such as Rio Tinto in the Simandou Project in Guinea.  Now you might point out that, Rio is one of the big three? But it is also the most financially leveraged of the three and keen for Chinese Cash. Joint venture investment in mines like Simandou helps improve Rio’s bottom line, while also giving China, Chinalco and the Chinese Steel Mills a useful bargaining chip. Clearly if Chinese Steel Mills can secure independent or guaranteed Iron Ore supply from outside the Three Big suppliers then they can redress the balance of power, restoring balance and securing better pricing terms for Chinese Steel mills. This is however a long-term proposition.

Mining Iron Ore at the Pilbara

The Second step in this process of increasing the bargaining power for China is through government investigation of monopoly behaviour by the big three.  In the past week there have been two separate releases of statements about investigations of this kind. The first investigation is into the BHP Billiton – Rio Tinto joint venture Iron Ore mining operations in the Pilbara region of Australia. China clearly sees this as increasing the collective power of both BHP and Rio. This joint venture also came on the back of the collapse of the proposed increase in Chinalco’s investment into Rio Tinto in 2009. So there could also be some bad blood here, providing a political motive for an anti-monopoly investigation.  The second anti-monopoly investigation muted only a few days ago is into the move towards short-term Iron Ore pricing by the big three: Rio Tinto, BHP and Vale.  These two muted investigations can be seen as politically motivated to ‘encourage’ the Big Three to be careful in how they structure their pricing contracts. The message? China is watching.

China has always had a long-term outlook, and their approach to business, trade and investment is no different.  The first step in securing new independent sources of Iron Ore is part of this long-term strategy, while the second step in suggesting the potential for anti-monopoly investigations is very much a short-term strategy to keep the Big three at the negotiation table. These two strategies can be interpreted as a discrete suggestion by the Chinese Government that the big miners should return to the negotiation table, and that an industry wide move to short-term pricing, will not be a sure thing, especially when it comes to China. It is all about attempting to redress the negotiating imbalance of power back in favour of the Iron Ore Buyers, and as a result Chinese Steel Mills.

Only time will determine the success of these strategies.

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