Iron ore: BHP signs contracts with Shandong ports for yuan-settled business

Global mining company BHP has signed contracts with Shandong ports, which account for about a quarter of China’s annual iron ore production, to settle iron ore spot trade in yuan this year. All four of the world’s major iron ore producers are now working with Chinese ports to settle spot trade in yuan (read more here).

According to insiders, this trend reflects the steady increase in pricing power of China, the world’s largest buyer of iron ore, thanks to the development of China’s commodity exchanges and multiple measures to increase the country’s collective bargaining power in the global market.

However, it has been noted that spot trading is only the first step in expanding the yuan’s pricing power, and hopes are leaning toward the yuan’s settlement also gaining traction in long-term contracts, an important form of bulk commodity trading by large steel companies, which is currently settled mainly in dollars.

According to Song Wei, senior manager of Qingdao Port International Co.’s operations and trading department, “Last year BHP started yuan-based spot trading of iron ore, and this year we signed contracts directly with the company for this type of business. It also means that all the “four global iron ore mines” (Brazil’s Vale, Australia’s BHP, FMG and Rio Tinto) have started using yuan as the settlement currency for spot trade in our port.”

This is a significant step in expanding China’s pricing power in the global market as a result of Chinese ports’ efforts and active government facilitation.

China is the world’s largest importer of iron ore. In 2022, China’s iron ore imports decreased by 1.5 percent from the previous year to 1.11 tons.

But analysts predict that the volume of iron ore imports could increase this year, fueled by a rapid economic recovery that boosts demand. This could also boost imports from Australia, whose economic ties with China have improved as bilateral relations have thawed.

Iron ore shipments from Australia now account for about 60 percent of China’s total, while Brazil accounts for 30 percent.

Iron Ore China Import Price

In July, BHP’s first yuan spot shipment of iron ore docked at the port of Rizhao, China’s main port for iron ore trade in East China’s Shandong Province. Rizhao became the first Chinese port to support the spot trade of all four global iron ore producers.

Overseas mines that carry out yuan settlement for spot trade at the ports are helpful for the wider application of the yuan in commodity settlement and reduce the use of the greenback among the possible economic risks from huge exchange rate fluctuations for Chinese steel companies.

Insiders pointed out that, in the future, Chinese companies should actively promote the adoption of the yuan as the pricing currency for long-term contracts, indicating that iron ore producers may have accepted the price formed by the Chinese market and thus have a greater say in elevating the country’s pricing power.

In July 2022, the China Mineral Resources Group was formed in the Xiongan New Area in North China’s Hebei Province, a long-awaited move that would give China a greater say in iron ore pricing, leveraging the country’s strength as the world’s largest iron ore consumer.