How China’s energy crisis could be good for BHP (ASX:BHP) and Rio Tinto (ASX:RIO)

The iron ore price found its feet recently and BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO)…

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China power crisis BHP Rio Tinto Man holding up wires after getting electric shock

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The iron ore price found its feet recently and BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) shareholders may have China’s energy crisis to thank for this.

In case you forgot, the price of the steel making mineral plunged by more than half.

The commodity hit a record high over US$200 a tonne in May 2021 before bouncing last week. It’s currently trading at around US$100/t.

Power blackouts a boon for BHP and Rio Tinto

It’s not easy to nail down what prompted bargain hunters to jump in to support the price. But Macquarie Group Ltd (ASX: MQG) suspects its mainly to do with the rolling power blackouts that’s gripping parts of China.

The Chinese government is ordering industries and households to ration the use of electricity. This has impacted on electric arc furnace (EAF) operators more than traditional steel mills.

“Macquarie Commodity Strategy Team believes lower EAF operation could also be behind the iron ore price rebound late last week,” said Macquarie.

“As current production curtailment has shifted from emission reduction driven to power supply shortage driven, EAF mills have seen a clear drop in their operating rate over past two weeks, helping demand for integrated mills that use iron ore.”

Iron ore price stabilises at expense of EAF operators

EAF is a greener way of producing steel but it requires more power. The process uses scrap steel and direct reduced iron as raw material.

As output from EAF facilities are cut due to China’s electricity shortage, iron ore hungry steel mills are having to step up.

BHP and Rio Tinto share prices getting lift from China’s misstep

If so, this is a double-own-goal by the Chinese government and the irony shouldn’t be lost on ASX investors.

The crash in the iron ore price was in no small part triggered by the Communist Party’s policy decisions.

Officially, it wanted to drastically cut pollution ahead of the Winter Olympics and ordering steel mills to curtain production was an easy way to achieve this.

Unofficially, they seething that Australia was benefiting from record iron ore prices.

Market manipulation malfunction

But what significantly contributed to China’s power crisis was its decision to ban Australian coal imports.

Its aging infrastructure combined with a shortage of coal in that country have been blamed for China’s current predicament.

China’s addiction hard to break

To rub salt to the Chinese wound, iron ore exports from ASX iron ore producers, including Fortescue Metals Group Limited (ASX: FMG), have increased lately.

“The combined shipping rate for RIO, BHP and FMG in September to date has increased above the 800mtpa mark, at 847mtpa,” added Macquarie.

“By contrast, Vale shipments slowed by 12% to 6.2mt.”

Despite strong political will, China and Australia may not be able to sever economic ties as easily as they would like.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited, and Rio Tinto Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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