Energy & Resources

Digging in

China battled the iron ore miners, but was happy to corner rare earth prices

Digging in

Sparks flew: angry Chinese officials felt the big three miners were making its steelmakers overpay for iron ore

Bust-ups over billion-dollar deals; arrests and lengthy prison sentences; vicious newspaper editorials, and even the occasional diplomatic slap down. Few industries have made as many headlines in these pages as iron ore, which has offered a saga of confrontation worthy of a Nordic bard. And most of the bad blood can be traced all the way back to some of our earliest issues.

Why? In the standard narrative, most multinationals beating a path to China expect to pay a price for market access. Perhaps the foreign firm will be asked to give up equity in its China venture, or to licence its brands and technology to the local partner. But iron ore miners BHP Billiton, Rio Tinto and Vale seem to have succeeded in thumbing their nose at their all-powerful Chinese host – even when it counts as their most important customer.

Because of this, the miners’ relationship with China’s steelmakers – fractious but fundamentally interdependent – has been consistently newsworthy.

On the steelmaking side, the frustration is that the miners have made a fortune without being prepared to grant much in return. This was felt especially keenly in the months following the global financial crisis, when steel production spiked as a result of Beijing’s Rmb4trillion stimulus campaign. Prices for iron ore boomed despite weak economic conditions elsewhere, so the role of Chinese demand was there for all to see.

Negotiators from the China Iron and Steel Association decided that this was the time to play hardball, telling the miners that they had to come up with a better deal.

But the miners stood firm and it was the Chinese who blinked first, after CISA failed to get its members to agree on a common stance (WiC25).

The industry had splintered into rival interest groups, many of whom were benefitting from arbitraging the existing pricing terms in the domestic market (WiC95).

CISA’s defeat was just one of a series of its attempts to wrest more control from the iron ore trio. Another tactic was to try to buy stakes in overseas mines. Some transactions went through successfully but the biggest bid for ownership of ore at source – a massive new investment in Rio Tinto by Chinalco – collapsed in acrimony in 2009. “An act of perfidy,” claimed an incensed Xinhua at the time, accusing Rio of behaving like “a dishonourable woman”.

Tension mounted when Rio then saw one of its senior executives thrown into prison on corruption charges (see WiC55). But even as the trial was progressing, Rio was concluding a happier negotiation with Chinalco for another deal, this time for a shareholding in its Simandou iron ore project in Guinea. From pariah to partner again, all in just a few short weeks.

Nonetheless, the adversarial undercurrents haven’t disappeared completely, although it’s now Brazil’s Vale complaining about rough treatment, as its new fleet of mega-vessels is denied access to Chinese ports (see WiC135).

The speculation this month is that the Brazilians are hitting back by refusing to charter vessels from Cosco, a leading Chinese shipping firm.

In the meantime the struggle for resources goes on. CISA has switched tactics again this year by launching a new iron ore exchange that it hopes will allow for greater influence over spot prices.

Others have suggested that the “Chinese super cycle” of commodity demand is coming to an end and that the miners will soon have to be much more flexible with their prices.

The second major resources story covered by WiC over its first 150 issues is a contrasting tale to iron ore, although it also stands out as another struggle for control of a key commodity.

But here – in the rare earths industry – it is the Chinese who are said to have the whip hand, while it’s the rest of the world doing all the complaining about unfair business practices.

The 17 different metals that are collectively called rare earths are used in products ranging from smartphones to Patriot missiles. Currently, Chinese miners account for a huge share of rare earth production (97% is the figure often mentioned) and they’ve been looking to exploit their advantage by driving up prices.

That should have come as no great surprise to WiC’s subscribers. Back in WiC13 we first cited suggestions by a National People’s Congress delegate called Zhou Hongyu that exports be reduced to 30,000 tonnes annually. The goal was clear enough: to create a small group of heavyweight miners to “bring high profits and allow the sustainable development of China’s rare earth resources”. Zhou thought that the plan would give the Chinese miners “a long term grasp over rare earth pricing power”. As far as we are aware, our article was the first warning in an English language publication that China was seeking to overhaul its rare earths industry.

What happened next? Industrial customers in North America, Japan and Europe started to complain that a raft of new export quotas was forcing up prices for a number of the metals. And within weeks came the first warnings from US government agencies that export controls were giving Chinese firms an unprecedented influence over the market.

The issue then spilled over onto the front pages in October 2010, when the skipper of a Chinese fishing trawler was detained by Japanese coastguards near a group of disputed islands in the South China Sea.

In the diplomatic brouhaha that followed, the Japanese reported that their manufacturers were having even greater difficulties sourcing rare earth imports from China. The subtext was that Beijing was wielding its monopoly as part of the maritime dispute. If so, it worked: the trawler captain was soon released.

For their own part, the Chinese have argued that their policy is a responsible one in husbanding scare resources, as well as limiting the environmental damage caused by the mining industry.

Rather than criticism, they expect recognition for their efforts. “Compared to countries also rich in rare earth resources, but refusing to mine them, China is now providing 31% of its reserves for more than 90% of the world’s supply, making great contributions to the supply and stability of the rare earth market,” Chen Deming, the Minister of Commerce, insisted recently.

Chen may be waiting a while for the thank you note. International frustration on the issue has grown, and in March this year the EU, US and Japan filed a formal complaint at the World Trade Organisation (WiC143) claiming undue restrictions on exports. President Obama added that the US had little choice but to act. “American manufacturers need to have access to rare earth materials which China supplies. If China would simply let the market work on its own, we’d have no objections,” he warned.

China’s response is that its rare earths policies don’t breach WTO rules. But the stage seems set for another round of resource confrontation in the months ahead.

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