China looks to diversify iron ore supply amid price rally, trade tensions

While China plans to increase the equity output that local companies own in overseas iron ore mines and to accelerate work on projects in foreign countries in the next five years, industry experts do not expect the supply structure of its imports to change significantly in the near term.

After iron ore imports hit a record 1.17 billion tonnes in 2020, the world's largest steel producer said it planned to lift the output from interests held by Chinese companies overseas to more than 20% of its iron ore imports while building a number of globally significant mines by 2025, according to a five-year plan released by the Ministry of Industry and Information Technology, or MIIT.

The plan, which is open for public feedback until Jan. 31, came after iron ore prices rose more than 70% in 2020. The MIIT said the plan is aimed at ensuring sufficient supply of the steelmaking ingredient and strengthening its control over pricing.

Pricing power

Everbright Future's research director of steel and coal, Qiu Yuecheng, sees the MIIT's plan as a move to strengthen China's pricing power after 2020's iron ore rally squeezed Chinese companies' margins. However, Qiu does not expect Chinese captive iron ore resources to increase to 20% within five years.

The margins of Chinese steel mills are susceptible to iron ore import prices due to their heavy reliance on shipments from abroad, said Wang Guoqing, research director of the Lange Steel Information Research Centre in Beijing. Wang said the industry is trying to learn from the model of the steel industry in Japan, which does not produce iron ore domestically but has a high level of equity output in overseas mines. On average, China imports 80% of the iron ore it consumes as domestic production and ore grades are low.

China has overseas capacity totaling 140.95 million tonnes per year in operation, or about 12% of China's total imports in 2020, while 138.76 Mt of overseas capacity is locked in assets that are stalled or have yet to open, according to data compiled by S&P Global Platts.

Li Xinchuang, president of the China Metallurgical Industry Planning & Research Institute, said earlier this month at an industry conference that Chinese steel companies should "break the grip" by speeding up acquisitions to ensure sufficient and diversified iron ore supply, Chinese media Jiemian reported Jan. 9.

The steel sector is aiming to increase self-sufficiency in steelmaking raw materials, including iron ore and steel scrap, to 45% by 2025, according to the MIIT's statement. While China still has a long way to go to lift its domestic iron ore production and Chinese ownership ratio in imports, Qiu expects growth to come from larger domestic scrap production.

Australia to continue as largest supplier due to challenges in Africa

Industry experts believe that Australia, which accounted for 82% of China's iron ore imports in 2019, will continue to be the biggest source of Chinese imports as Australia has abundant supply and a geographic advantage given its relative proximity to Chinese buyers.

Chinese-owned projects and equity output in operation in Australia account for 77.3% of its overall overseas iron ore capacity, according to Platts data. The biggest Chinese-owned iron ore project in operation in Australia is Sino-Iron, which has an annual capacity of 20 million tonnes and is 80%-owned by Chinese conglomerate Citic Ltd. and 20%-owned by Metallurgical Corp. of China Ltd.

The MIIT outlined China's plans to accelerate the construction work at large iron ore projects in West Africa and Western Australia and to strengthen cooperation with resource-rich Russia, Kazakhstan, Mongolia, Cambodia and other countries.

While Africa is a more obvious destination to expand into, the continent presents a lot of challenges, Jeremy Stevens, Standard Bank Group's Beijing-based economist, told S&P Global Market Intelligence. Each country in Africa poses unique hurdles such as old orebodies, regulatory issues related to exports, royalties and tax, and the quality of logistics and stability of electricity supply.

Shared logistics between countries is a big long-term issue in Guinea and in wider Africa, Stevens said. "For example, copper is trucked from DRC or Zambia to Durban in South Africa because the railway line that has been talked and talked about remains unclear."

Wang said Chinese companies need to spend time on infrastructure construction at overseas mines such as Simandou. "Logistics is the biggest challenge and the project requires significant work on building railways for transportation."

On the other hand, Sherif Andrawes, BDO's corporate finance global leader for natural resources, said China has the patience and funds needed for plans to develop more iron ore supply from Africa for many years.

Developing Simandou is a long road

China's ambition to diversify its iron ore imports has become evident after trade tensions with its largest iron ore supplier, Australia. In 2020, the country's largest steel producer, China Baowu Steel Group Corp. Ltd., led a consortium of state-owned steel producers in acquiring shares of the long-stalled Simandou iron ore project in Guinea from Aluminum Corp. of China Ltd., or Chalco. Chalco parent Aluminum Corp. of China, or Chinalco, has been developing Simandou Blocks 3 & 4 for many years with Rio Tinto without announcing much progress on the project.

As the largest mine of its kind, Simandou has the most potential if China needs a source of iron ore outside Australia and Brazil, Andrawes told Market Intelligence.

"There are lots of challenges, but the prize is a large one. … It's unlikely there will be any big new resources brought on tap within five years, more likely five to 10 years, but if anyone has the patience to do that, it's going to be China," Andrawes said.

Meanwhile, work at Simandou has resumed. "Activity at the mine area is starting including roadworks," according to Rio Tinto's fourth-quarter operational report.

S&P Global Platts' Jing Zhang contributed to this article as a co-author.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.