‘Force them to give us a discount’: ASX 200 mining shares lift despite China’s latest move to curb iron ore prices

Is China about to threaten the country’s largest export?

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Key points

  • Reports suggest China is planning on controlling all iron ore imports under a single state-owned umbrella
  • The goal is to set the market price for the steelmaking commodity
  • One analyst holds his reservations about the effort being successful

Despite reports that China plans to wage war on the iron ore price, ASX 200 mining shares were in the green on Thursday.

In an effort to remove volatility from the steel-making commodity’s price, China wants to monopolise the country’s iron ore imports. As the largest purchaser of annual iron ore production, the country hopes to ‘force’ a lower selling price.

If true, this would be the latest incident of China dealing a trade blow to Australia. Not long ago, the People’s Republic ditched foreign ties over a range of goods after Australia called for an investigation into the source of the COVID-19 pandemic.

At the time, ASX 200 iron ore mining companies dodged a bullet, with China unable to feed an alternative source. However, these recent developments suggest the Xi Jinping-led country could threaten the lucrative industry.

Applying a chokehold on ASX 200 mining shares

Earlier today, my colleague Zach covered analyst expectations of a more buoyant iron ore price for the remainder of the year. While insightful in their own right, perhaps those estimates failed to factor in China’s latest plan.

Reportedly, the China Iron and Steel Association is joining forces with state-owned steel groups to form a group capable of dictating prices. The ambition isn’t farfetched considering China accounts for 70% of annual purchased iron ore production. In total, the country imports around 1 billion tonnes per year.

The Australian Financial Review sourced comments from an unidentified Beijing policy adviser on the matter, with the individual stating:

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. That would force them to give us a discount.

Under such circumstances, ASX 200 mining shares could see profits dwindle as they fall beholden to a state-owned customer that would account for 70% of demand.

Despite this, ASX-listed iron ore giants such as BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) appeared relatively unfazed today. Shares in the two companies ended the day up 0.25% and 0.67% respectively. Although, shares in Fortescue Metals Group Limited (ASX: FMG) closed 1.26% lower.

Harder in practice

While the possibility of a state-controlled conglomerate could pose a threat to miners, not everyone is convinced it will happen. On paper, it seems relatively straightforward: but in practice, such a move might be difficult to pull off.

One such person who isn’t so sure about China curbing the market is Liberum analyst Tom Price. The London-based broker shared his perspective with the AFR, saying:

Even if a price agreement is secured, smaller mills and traders may go and do deals with iron ore mines on the side. Then the whole thing breaks down.

For now, the iron ore price sits near US$132.50 per tonne — down approximately 35% from a year ago. Many ASX 200 mining shares are in the green this year after a rebound in the price of iron ore.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. 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 Scott Phillips.

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