China establishes mineral resources group to centralise iron ore purchasing

Danielle Crowe, Mariam Azzo, Samy Mansour, Stuart MacGregor and Brett Cohen
04 Aug 2022
Time to read: 2 minutes

The establishment of China’s state-backed iron ore company is an attempt by China to shake-up the global iron ore market and highlights China’s focus on managing its purchasing power and pricing for iron ore.

China is the world’s largest consumer of iron ore spending about $US180 billion ($260.4 billion) on iron ore imports last year, feeding the roughly 500 steel mills in China, each responsible for buying its own raw materials. In contrast, iron ore supply is highly concentrated with the iron ore majors dealing with smaller Chinese buyers on an individual basis.

On 19 July 2022, China formally established the China Mineral Resources Group (CMRG), a company which is set to become China’s central purchaser of iron ore with the stated aims of centralising iron ore demand, tightening control over the global steel market and giving Chinese steel producers more bargaining power over prices.

With a registered capital of 20 billion yuan ($4.3 billion), CMRG “was registered with businesses spanning mining, ore processing and trading, international freight services, supply chain management and asset management services”.

The goal is for CMRG to become the sole Chinese channel for buying imported iron ore from third parties across the globe, by assuming broad responsibility for raw materials supplies to the country’s sprawling steel industry, which absorbs about 70% of global production (mostly from Australia).

The underlying rationale for CMRG

In December 2021, China’s senior government officials and top steel industry executives outlined a strategy designed to break Beijing’s dependency on Australian iron ore and aimed to boost domestic iron ore production by 30%, increase investments in overseas mines and strengthen scrap steel recycling. This strategy came off the back of the Chinese Government’s frustration with unstable iron ore prices and its desire to follow Japan’s lead by investing heavily in offshore mines.

The announcement comes at the same time BHP and Rio Tinto signalled impending turbulence for commodities producers as costs continue to increase and demand skyrockets.

The reactions of (and impact on) Australia’s big mining players

Although CMRG is the first of its kind, there is nothing to suggest that China won’t consider this strategy in the context of other commodities if CMRG is successful.

China already has established more informal purchasing groups in respect of other commodities, such as oil where large state-owned oil refiners collectively buy crude and issue bids to global suppliers or copper through Jiangxi Copper Co., which is made up of a group of 10 members who collectively negotiate raw materials contracts with BHP and other miners (accounting for more than 80% of China’s imports).

Understandably, any attempt to shake up the global iron ore trade may have ramifications for Australian exporters. However, there do not appear to be any signs of panic publicly among Australia’s big iron ore players. Many commentators are sceptical of whether CMRG will achieve its stated aims, arguing that supply and demand are more important drivers of commodity prices.

Relevant stakeholders should closely monitor the situation and stay abreast of new developments. If you are a resource exporter to China – be sure to keep in mind the potential for China to apply this structure to other critical resources in the future.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.