The initiative, led by the China Iron and Steel Association and the planning ministry, involves large state-owned mining and steel groups such as Baowu, China Minmetals Corp and Aluminium Corporation of China, according to people familiar with the effort.
China is the world’s biggest consumer of iron ore with its 1bn tonne a year steel industry absorbing about 70 per cent of global production, most of it supplied by Australia. Any move to gain control over prices will probably alarm Canberra given iron ore’s status as the country’s top export.
Beijing hopes the new entity can secure lower prices through larger bulk purchases made on companies’ behalf.
The project will also seek to boost domestic iron ore output and organise bigger investments in overseas mines.
Government officials and policy advisers told the Financial Times that Xi’s administration had grown frustrated by large price swings over recent years in an industry dominated by Australian producers such as Fortescue Metals Group and BHP, which are likely to be highly concerned by the move.
When Beijing sought to punish Australia after Canberra called for an international investigation into the origins of the Covid-19 pandemic, Chinese buyers boycotted Australian goods ranging from coal and rock oysters to wine. But they could not find enough alternative sources for iron ore, the key raw material needed to make steel.
“The [world’s biggest] iron ore suppliers will have no one else to turn to when it comes to serving the world’s largest market,” said a Beijing-based policy adviser, who asked not to be named. “That would force them to give us a discount.”
China could in theory reduce its dependency on Australian iron ore by increasing purchases from big Brazilian producers, such as Vale.
It is also backing a consortium developing the large Simandou deposit in Guinea, which could produce 200mn tonnes if all of its blocks are mined. The project, however, will require at least $15bn in related infrastructure costs, according to analysts, including a 650km railway across the African nation with 169 bridges and four tunnels that will take years to build. A formal development agreement with the Guinean government is expected soon.
Chinese industry executives and officials have been frustrated by the volatility of the benchmark Platts Iron Ore Index, which hit a record high above $230 a tonne a year ago before plunging more than 50 per cent in the second half of 2021 and then rebounding by two-thirds. It is currently trading at $134 a tonne.
“We are having trouble planning production because iron ore prices change so quickly,” said an official at Nanjing Iron and Steel, a state-owned producer based in the eastern Jiangsu province.
Some analysts, however, are sceptical that Beijing can impose discipline on the hundreds of smaller mills scattered across the country.
“Even if a price agreement is secured, smaller mills and traders may go and do deals with iron ore mines on the side,” said Tom Price, an analyst at Liberum, a London-based brokerage. “Then the whole thing breaks down.”
Yet Chinese demand projections are often wrong because domestic market conditions can shift rapidly. Since April, sentiment has deteriorated rapidly in the world’s second-largest economy because of the impact of rolling lockdowns on big economic centres such as Shanghai that were imposed to enforce Xi’s zero-Covid policy.
In such circumstances many mills could be forced to scale back iron ore imports even if doing so violated bulk buying agreements.
“We are going to do what’s in our best interests,” said an official at Delong Steel, a small mill in central Hebei province.
Additional reporting by Tom Mitchell in Singapore
