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Chinese iron ore buying platform sparks warning

A centralised iron ore purchasing platform in China could see a structural transfer of profit margins from miners of the commodity to steel-makers, analysts have warned.

Bloomberg reports China’s National Development and Reform Commission is eyeing a single state-backed buying bloc as a way of wresting control of soaring prices for the commodity.

Some believe it could usher in a return to pre-2010 days when iron ore prices were set collectively on an annual benchmark basis compared to today’s practice whereby producers and steel mills agree on prices independently with reference to the spot market.

The idea is the latest in a series of initiatives introduced by the Chinese government this month to temper a rally in iron ore prices since November by clamping down on speculation in the market and preventing the hoarding of tonnes.

Iron ore prices have rallied from about $US90/t in November to more than $US150/t this month, but China’s recent intervention has seen them dip.

Romano Sala Tenna, of Katana Asset Management, said he believed the centralised buying platform represented an attempt by China to smooth out short-term volatility in the market and reduce some of the speculation, which made it difficult for steel mills to manage inventories and pricing.

He said a redistribution of margins from speculators and iron ore miners to Chinese steelmakers was likely as a result.

“I do think there is definitely going to be some margin transfer with this,” he said.

“How much will depend on underlying demand-supply dynamics. In a tight market, I think it will be modest, in a buoyant market, I think this has the potential to have an impact on iron ore producer margins.”

RBC Capital Markets analyst Tyler Broda said the platform would allow China to better manage demand and pricing for iron ore particularly given the consensus view that steel consumption in the Middle Kingdom had peaked or would peak over the next few years.

“In our view, centralisation and co-ordination would likely transfer value at the margin to China apart from when the market was in a material deficit, which we don’t forecast out through 2026,” he said.

Mr Broda noted the central buying platform could also give China another angle from which to project political power, particularly with its relationship with the world’s top producer Australia becoming increasingly frayed.

Mr Sala Tenna said a centralised Chinese buying platform could prompt Australian iron ore producers to form an formal or semi-formal selling alliance.

“I think they will be working out how they can mitigate the impact of this as much as possible,” he said.

“You might see some of the timelines for replacement tonnes that the majors are working on drag out a bit, so that the market is kept a bit tighter for longer.”

However Mr Sala Tenna said iron ore miners might welcome some reduced price volatility, which played havoc with shareholder expectations and returns.

Shaw and Partners resources analyst Peter O’Connor said it remained unclear whether the central buying platform was anything more than attempt to jawbone prices down, but he considered the idea an attempt by China to “take some of the noise out of the market”.

He said it could signal a return to the historic Japanese-style benchmark pricing system but argued iron ore prices would continue to reflect supply and demand fundamentals, just with lags and leads.

Last year, China imported 693 million tonnes of iron ore from Australia or 61 per cent of a total 1.125 billion tonnes valued at $US180 billion.

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