Inside Beijing's bid to tame the global iron ore market

By Melanie Burton

Dec 29 (Reuters) - China's state iron ore buyer is using increasingly hardball tactics against mining giants such as BHP to tighten its grip on the $132 billion seaborne market and extract better terms for steel mills, just as a giant new source of supply is set to strengthen its hand.

China Mineral Resources Group (CMRG) in November asked its steel mills and traders not to buy spot cargoes of a second BHP product, months after it blacklisted a first that drew concern from top supplier Australia's prime minister.

The standoff over a deal for next year's supply marked an escalation because CMRG had not previously banned multiple products from a single supplier, traders and analysts said.

That underscores how far the three-year-old buyer is willing to go to wrest better terms for China's steel industry.

The deal under negotiation will account for the lion's share of production from BHP's mines in Australia's northwest, and around a fifth of China's needs.

Reuters' interviews with more than three dozen steel and mining executives, traders and analysts suggest CMRG has become more assertive, but found limited success. Some steelmakers have privately complained it has not delivered the better prices or contract terms they were seeking.

Still, CMRG's tactics with BHP could set a precedent for deals with Rio Tinto, Fortescue and Brazil's Vale, said RBC analyst Kaan Peker in Sydney, as China looks to cut into the 80% margins the iron ore miners have historically enjoyed.

While refining its strategy, CMRG has enjoyed some wins and made some missteps.

In a previously unreported move, the Chinese buyer extracted a $1 per metric ton freight-linked discount on certain large cargo ships from Rio last year, said three sources with knowledge of the matter.

CMRG also became the only authorised Chinese seller of iron ore from billionaire Gina Rinehart’s Hancock Prospecting, a source familiar with the matter said, after a protracted standoff in which mills and traders said they were pressured not to buy Roy Hill MB fines on the spot market for more than a year.

But in executing the strategy, CMRG made life more difficult for its own steelmakers. It targeted a lower-grade product that was popular during times of painfully thin margins, forcing mills to pay more to source elsewhere.

CMRG then refined its approach to choose products that would exert maximum pressure on individual miners while limiting market disruption.

Mills banned from buying BHP's Jimblebar fines in September found an easy substitute in Rio's Pilbara blend fines, several Chinese traders said.

BHP CEO Mike Henry told Canada's CTV in late December that negotiations with Chinese customers were continuing.

Hancock, Rio, Fortescue, BHP and Vale declined to comment to Reuters.

CMRG, the State-owned Assets Supervision and Administration Commission that directly supervises CMRG, the state-backed steel association and the world's biggest steelmaker, China Baowu Steel Group, did not respond to requests for comment.

IN SEARCH OF LEVERAGE

China formed CMRG in 2022 to leverage its role as the world's largest iron ore buyer to wrestle better terms from miners whose fat profits rankled when steel mill margins were paper-thin or even negative.

CMRG is now negotiating on behalf of mills for more than half of China's 1.2 billion-plus metric tons of annual iron ore imports, according to Wood Mackenzie estimates.

CMRG is seeking larger discounts on index-linked prices and negotiates some other terms like shipping and encouraging more transactions through a domestic index.

Early on, some steelmakers complained privately that CMRG's presence merely raised costs and removed flexibility with their suppliers. Ceding negotiation rights was a bitter pill, but refusing what amounted to a political task was not an option, especially for state-owned mills.

While CMRG increasingly dominates annual contract negotiations, mills and traders said it has largely failed to deliver better prices.

"No, it did not get any better prices or terms for us, and we need to pay additional commission fee for the 'service', but what choice do we have? It's a political task and you have to cooperate," said a manager at a steelmaker, who declined to be identified due to the sensitivity of the matter.

CMRG's commission fees raised procurement costs for several mills that were already struggling with low margins from a property sector downturn, steel industry sources said.

But particularly for smaller mills, there have been benefits. CMRG helped those unable to access credit lines needed to import iron ore by acting as the buyer of cargoes on their behalf, according to two people with knowledge of the matter.

CMRG has also become an aggressive buyer of spot cargoes through its Shanghai-based trading floor in an effort to reduce price volatility, said three sources, who also said it has a 100 million-ton trading target for 2025.

NEW SUPPLY SOURCE LOOMS

Despite China's slowing growth, iron ore prices have remained resilient, trading above $100 a ton since July. Wood Mackenzie expects prices at $98 a ton for 2026 and $95 a ton for 2027.

But from 2028, the vast Simandou project in West Africa's Guinea is slated to produce around 7% of global supply, tipping the market into an estimated 65 million-ton surplus and giving CMRG a better bargaining position.

Chinese firms are the biggest stakeholders in Simandou, followed by Guinea and Rio, which owns a 22.5% share.

"The ramp-up of Simandou is widely seen as heralding that structural shift in market dynamics. It will fragment (Australia's) dominance in supplying iron ore to China," RBC's Peker said.

In that context, Peker said, "it makes sense" for China to play hardball for better contract terms this year.

But most mining executives who spoke to Reuters shared the view that CMRG would struggle to influence a market where it does not dominate supply.

"The Chinese would really like CMRG to be more effective. So far, the fundamentals of demand and supply continue to define the price," said Gautam Varma, founder of commodity advisory firm V2 Ventures, who previously worked at Fortescue.

(Reporting by China newsroom, Melanie Burton in Melbourne and Marta Nogueira in Rio de Janeiro; Additional reporting by Kirsty Needham in Sydney; Editing by Tony Munroe and Jamie Freed)