Welcome to the first article in the column: 简单兵法 - Simple Art of War, with focus on strategic and economic issues. Part 1 of 2 on Iron Ore.
CONTROL AND COORDINATE IRON ORE SALES:
The Australian Government should introduce legislation to create an Iron Ore Industry Corporation under the control of the Department of Foreign Affairs and Trade - with the following powers:
Industry research and strategy formulation
Allocation of quarterly iron ore export quotas, commencing summer 2022/2023 quarter
Determination and enforcement of industry Free On Board (FOB) floor price
WHY ? WHAT JUST HAPPENED ?:
On July 19, 2022 the China Minerals Resources Group (CMRG) was launched. This key part of the “Foundation Plan” to give China more resource self- reliance, was discussed in the “Two Sessions” in March, 2022. The important strategy decisions are:
Increase Chinese domestic iIron oOre output by 100 Million Metric Tonnes (MT) per year to 370 Million MT by end of 2025 .
Develop wholly and partially Chinese- owned iron ore mines overseas, primarily Simandou in Guinea. Currently 8 % of imported iron ore is from Chinese- owned mines. Japan has about 60%.
Steel recycling planned to be the raw material for 30% of new steel produced in China by 2025. China has increased steel recycling from around 11% in 2014 to around 22% in 2019, but the scrap for recycling remains significantly from imports, while . 69 % of U.S.-S produced steel is from recycled steel.
Bulk Centralised Procurement (BCP) (批量集中采购): CMRG will coordinate purchasing on behalf of major steel producers, starting in late 2022.
WHY BCP FAILED BEFORE：
Actually, it worked for a long time…..
SUBSIDISED BRAZILIAN DEVELOPMENT
In the early days of the Australia - China iron ore trade, China bought through large state buyers and paid a higher Cost and Freight (CFR) (China port) price to Brazilian producers to encourage production and compete with Australia.
If only cost was considered, China would buy 100% of iIron ore imports from Australia due to low freight costs and high quality.
ASYMMETRICAL LONG- TERM CONTRACTS
Prices were set using long term contracts with asymmetrical contract enforcement. If global markets fell, Chinese buyers could in practice and did “renegotiate” in other words, renege, on long- term contracts. If iron ore prices rose, Chinese buyers enforced performance of low-priced contracts under Australian Law.
MONOPSONY COLLAPSE
In 2009, the iron ore market experienced upward price pressure due to an enormous demand surge created by distortions in the Chinese economy as a result of state spending on infrastructure and housing stimulus. This created the historic opportunity for sellers to move to short- term contracts, allowing producers to capitalise on price peaks, and sell cheaply when the market was weak without being committed to staying cheap when prices recovered.
Stern Hu and Rio sales team were arrested.
The China Iron and Steel Association (CISA) demand for an 82 % price reduction compared with the international market price failed, smaller buyers bought directly from the big producers (, Rio, / BHP, and / Vale,) and monopsony buying collapsed.
WHY CHINESE BULK CENTRALISED PROCUREMENT WILL WORK THIS TIME:
Biggest players - Bao An, An Shan, and ShouGang, have already committed to group buying through CMRG.
The top 10 producers account for 41.5% of Iron ore demand. They will be compelled to cooperate.
Policy and market forces will concentrate the Chinese steel industry and recession will accelerate this.
The trends of the last decade have been:
A) Advance of the state sector and retreat of the private sector
B) Return of the Party in management of both state owned and private sector corporations.
In a more strictly controlled society, both these factors strengthen the ability of the Party to enforce a policy of coordinated buying action.
The monopsony buying effort is planned to take place in the final quarter of calendar 2022, after Xi Jin Ping has cemented his position for a third term. Support will come from the top, with the help of media and all organs of power. Xi Jin Ping’s prestige will be at stake.
The market is likely to be weak anyway, due to decline in Chinese demand, making late 2022 a good time to attack market pricing.
COUNTERING CMRG MONOPSONY BUYING PRESSURE:
NEED FOR SPEED
Achieving cooperation among producers for a single desk for iron ore exports such as previously existed for wool, would take time and negotiation. The Supply side is already concentrated. We need to expedite having the right tools in place.
UNIFY AUSTRALIAN SUPPLIERS
In confronting Australian suppliers, CMRG would likely seek to maximise purchases from CITIC Pacific’s Sino Iron Ore mine, and then play suppliers against each other, reducing purchase orders and running down stocks to create selling pressure. They would probably pick one supplier in particular from which to disproportionately reduce purchases, induce price reduction from that company, and then expect others to match it.
PREPARE TOOLS NOW TO IMPLEMENT STRATEGY LATER
The purpose of export quotas and floor price legislation is to establish strategic tools for the Australian Government to frustrate Chinese strategies to depress pricing by pressuring suppliers. It would, enable retaliation for CMRG actions by reducing Sino Iron Ore export quotas and serve to tighten the market generally, should that be required.
In conclusion, This discussion does not seek to outline all likely Chinese strategies or all Australian counter strategies, but seeks to recommend the creation of tools to enable an effective response. Having tools in place may serve as a deterrent, especially if the market is relatively firm or stable at the time.
简单！5 Sep 2022
Now available, part 2: 铁矿法宝， military implications of iron ore.
Share this post