China No More Dependent Upon Foreign Iron Ore

The China Mineral Resources Group, created on July 19 with a registered capital of 20 billion yuan ($3 billion), will centralize purchasing for stateowned steel makers and merchants in order to present a consistent front in negotiations with foreign suppliers. Additionally, it will have mining equipment utilised abroad.

China's "Foundation Plan" for Iron Ore, which will be implemented over the next ten years, supports the measure. The proposal was allegedly developed by the China Iron and Steel Association, the trade group for the biggest iron and steel producers in the world, who had been charging outrageous prices for the raw material to foreign suppliers.

The idea has gained strong backing from the local governments of large steel-producing provinces as well as the National Development and Reform Commission, China's top state planner, enabling it to advance to the highest levels of the nation.

Leaked material has been disseminated in bits and pieces, mainly by the mining industry press. But no formal text has been made available to the public.

For the nation that manufactures the most steel globally, the goal is simple: secure access to iron ore.

This requires employing market power commensurate with the sector's size to lower the price of the commodity, which is mostly bought from companies like Australia's BHP and Fortescue Metals Group, Anglo-Australian Rio Tinto, and Brazil's Vale. China makes half the steel in the world, but it is incredibly reliant on imported ore; between 2015 and 2020, it will import more than 80% of its ore, up from 76.2% in 2017. In 2021, China will have imported iron ore worth about $180 billion. Its purchasing power is constrained by the fact that its 500 or so steel mills are scattered around the country.

With roughly three-fifths coming from Brazil and onefifth from Australia, its origins are also concentrated. In foreign iron ore mines, decades of mining investment had only resulted in equity of only 8% by the year 2020.

The foundation plan aims to change the equation in two ways: by adjusting the supply of iron ore in China and by changing the composition of the country's iron and steel sector.

The management team of China Mineral Resources comprises the top five executives from the four mining giants supported by the national government:

China Baowu Steel Group Corp. Ltd., China

Minmetals Corp., China Baowu Iron and

Steel Group Corp., and Aluminum Corp. of China (Chinalco). Most people have already made the decision to buy minerals through the new portal.

However, despite its domestic mining initiative and its associated costs and ramifications have not been fully investigated, its international initiative and its effects on purchasing have garnered attention.

SPECIAL FOCUS

Increasing Domestic Resources

The most ambitious aspect of the plan is probably increasing China's domestic iron ore supply. The goals are to increase domestic mine output to 370 million tonnes yearly and source 220 million tonnes through scrap recycling, according to Lu Zhaoming, the CISA's deputy secretary-general. Both show an increase of 100 million tonnes from 2020 levels.

In 2030 and 2035, respectively, the targets for scrap steel will increase to 350 million tonnes and 400 million tonnes.

According to industry insiders, achieving such targets may reduce China's annual iron ore needs by 47%, assuming peak steel production of 1.065 billion tonnes in 2025.

But the devil is in the details.

In the past ten years, few nearby iron ore mines have received fresh money for exploration and development, an insider observed. Not that iron ore is short in China. Its known reserves, or those that are still underground, are ranked fourth in the world with 10.8 billion tonnes. The bulk of them reside in the provinces of Sichuan, Liaoning, Shanxi, Shandong, Hebei, and the autonomous territory of Inner Mongolia. These reserves are widespread and difficult to access, so it will take more time and money to dig them up.

Since they are predominantly composed of lower-grade magnetite, they take more effort to refine than the higher-grade hematite deposits in Australia and Brazil. The entire cost to extract iron concentrates from the earth in China varies depending on the mine, ranging from $60 per tonne to more than $100. An estimated $30 is spent on a tonne in Australia and Brazil.

Therefore, it should not be surprising that Chinese companies have focused on investing abroad, despite the fact that they have learned that market access has been

hampered by political and environmental restrictions and a lack of knowledge and experience.

The amount spent on domestic iron ore mining decreased from 169 billion yuan in 2013 to less than 100 billion in 2019, and it has since decreased to roughly 80 billion yuan, according to statistics from China's National Bureau of Statistics.

China's "Foundation Plan" for Iron Ore, which will be implemented over the next ten years, supports the measure. The proposal was allegedly developed by the China Iron and Steel Association, the trade group for the biggest iron and steel producers in the world, who had been charging outrageous prices for the raw material to foreign suppliers.

The domestic production of iron ore concentrate barely climbed 5.2% to 285 million tonnes in 2021, despite iron ore prices reaching all-time highs. To reach the aim of 85 million tonnes, annual output growth must double every year through 2025.

"Market oriented"

To boost domestic mining, the CISA and the China Metallurgical and Mining Enterprises Association have developed a list of more than 50 domestic projects that merit enhanced funding and development. the state-owned companies involved will independently choose which programs to sponsor.

Achieving the goals of the strategy would be challenging, given the costs and risks involved in investing in indigenous iron ore.

The establishment of mines is also subject to a multitude of complex approval processes, environmental impact evaluations, safety precautions, taxes, and levies, just like anywhere else. Nevertheless, some of those challenges might be overcome with national cooperation.

higher-level calculus

For a project to be financially viable, regulators and big iron and steel firms may not require domestic iron ore mining interests to be cost competitive with foreign mines, according to one analyst, Caixin.

This school of thinking holds that when major iron and steel producers directly invest in iron ore mining capacity, they are not required to make a profit on the ore. The mining sector's capacity to provide the steel mill with ore at or near cost makes it possible for the steel industry to be more lucrative.

When negotiating with foreign miners, steel manufacturers who are more self-sufficient are allowed to receive a discount on imported ore.

However, high costs might not matter if current geopolitical trends persist. The senior expert argued that, in order to safeguard the country against supply shortages, expanding China's industrial capacity may be essential.

If China can increase its own supply of iron ore, investments in domestic mines will reduce the likelihood that Chinese steel industries will be cut off from raw materials in the event of a serious geopolitical conflict with suppliers.