Business IdeasCracking the iron
China vs. Iron ore oligopoly: China could fracture the world’s iron ore oligopoly. Three miners – Vale, BHP Billiton and Rio Tinto – control two thirds of international trade. The big producers are consolidating, most notably with a joint production venture between BHP and Rio. China, the world’s largest customer, would like to keep its costs down and its supply assured.
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One way forward is through longer-term contracts at favourable prices. The government has already demonstrated gritty determination, pushing for a big decrease in the annual benchmark negotiations which have dragged on since March.
Alternatively, China can diversify supply by investing in iron ore mines abroad. That’s a mammoth task. China imported 440 million tonnes of iron ore in 2008, equivalent to half of all global exports and 45 per cent of its own use, after adjusting for China’s own lower quality ore, according to the UN Conference on Trade and Development (UNTCD). Assuming steel capacity grows at 5 per cent per annum, China will need an additional 40 million tonnes annually just to keep the steel mills turning.
But success is possible, with patience and deep pockets. The potential global supply of iron ore is ample, and new production is coming – around 430 million tonnes by 2011, according to UNTCD. The majority of that will come from Australia and go into the seaborne trade.
Even if the big three continue to dominate supply, China is forging new friendships with alternative suppliers. Unnamed Chinese financiers are providing $6bn of financing to Australian upstart Fortescue – a self-proclaimed “new force in iron ore” – which could produce 200 million tonnes annually in six years. Baosteel, China’s largest steel mill, has agreed to take a 15 per cent stake in Australia’s Aquila Resources.
China is also investing in Midwest Australia, a region where ore is more expensive to develop but remains untapped. And China is seen as a potential partner for the development of Anglo American’s Brazilian operations, which could contribute 10 per cent of all international iron ore by 2017.
As is typical in mining, it’s a long and risky game. The benefits from today’s investments will flow through over decades. But increased and diversified supply should help keep prices down in the long term and enhance China’s negotiating position with the big three miners. Even if China can’t break the world’s iron oligopoly, it can create fissures.