REPOST: China Plans to Create Iron-Ore Mining Giant

China is planning to form a conglomerate of iron-ore mining companies in a bid to limit the country’s dependence on material imports. The Wall Street Journal discusses the feasibility of this strategy and its impact on foreign companies' monopolistic pricing power.  

A worker operates a furnace at a steel plant in China's Anhui province.Image Source: wsj.com

BEIJING—China plans to create a conglomerate of iron-ore mining giants that would in 10 years produce at least half of its domestic ore, in a bid to end its steelmaking industry's dependence on imports of the material.

The government intends to form a large mining group to be led by Ansteel Mining Co., a state-backed company that is the country's largest ore producer. The new group would comprise six to eight mining businesses.

"This marks a strategy for our country to break our reliance on imported ore, and to support the transformation of our steel industry for international competitiveness," the Metallurgical Mines Association of China said in a statement on Thursday. The association is working with the Ministry of Industry and Information Technology to push the project, which wouldn't be completed until around 2025.

China makes half of the world's steel, but depends on global mining giants for most of the iron ore it needs. Imports account for around 70% of the ore used in China's steel production, the association said.

China produces about 1.5 billion tons of ore a year—more than any other country. But its domestic industry is highly fragmented, and its ore is regarded as low-quality compared to that from major producers such as Australia and Brazil, while twice as costly to produce, analysts say.

The government regularly complains about what it describes as the foreign suppliers' "monopolistic" pricing power. In 2010 Beijing played a key role in ending a 40-year-old term-pricing system that was created by these suppliers and that China said was unfairly stacked against buyers. Under that system, three global mining companies—Rio Tinto PLC, BHP Billiton Ltd. and Vale S.A.—met once or twice a year with Chinese state and industry representatives to set prices for most of the world's traded ore.

The shift to more transparent spot prices, however, hasn't yielded significant discounts. Even amid an ongoing economic slump, ore prices are still 9% higher this week than they were in March 2010, when the term-pricing system came to an end, and have been as much as 73% higher, according to data provider The Steel Index.

Consolidating the industry at home could help in giving China more sway over prices, but formidable obstacles remain, analysts say. State-owned enterprises and other big miners, producing more than 10 million tons a year each, currently account for just 35% of output, said Adam Wang, an industry analyst for Beijing-based consultancy CRU Group.

"The consolidation of this industry is going to be difficult, because it's very fragmented, more so than in the steelmaking industry," Mr. Wang said.

More than half of China's ore production comes from small miners producing 3 million tons or less a year, he said.

China's iron ore is also more expensive to produce because it is buried deep, and has half or less the iron content than that in locations such as Australia's Pilbara region. Chinese ore costs around 457 yuan ($75) a ton to produce, compared with $30-$60 a ton for imported ore, said Pan Guocheng, chief executive of ore miner China Hanking HoldingsLtd. 3788.HK +1.75%

This disparity drives China's dependence on foreign ore. Mr. Pan forecast that imports in 2016 would hit 949 million tons, or 77% of its total consumption, up from 72% last year.

China isn't about to turn its back on foreign ore altogether. In January, the country's top economic planning agency called on its steel companies to step up its search for viable iron-ore assets abroad.

Many such ventures in recent years have been plagued with expensive delays, but the National Development and Reform Commission said Chinese steelmakers should keep building stakes in global iron-ore assets in the interests of China's influence and strategic security in global trade.

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