Steel Stocks, Mining Giants React As China Iron Ore Consortium Enters Market

China is set to shake up the iron ore industry in 2023, with a Beijing-created consortium set to become the biggest buyer of the key ingredient in steel manufacturing as soon as next year. Mining stocks booked losses Friday while steel stocks made some gains amid a broader market sell-off The newly formed China Mineral Resources Group, a state-owned agency, is poised in 2023 to begin buying iron ore for around 20 of the largest steelmakers in China, according to Bloomberg News. China usually buys around two-thirds of the world market's iron ore, but the new agency could give China more collective bargaining power over industry prices and, with China's massive steel markets, could sway global iron ore markets.

China Mineral Resources Group has already begun to talk supply contracts with iron ore producing leaders Rio Tinto (RIO), Vale (VALE) and BHP Group (BHP), Bloomberg reported Friday.

China's state-owned iron and steel company, Baosteel, the world's largest steel manufacturer, has already allocated purchasing of more than half of its 2023 iron ore imports to China Mineral Resources Group, according to Reuters.

The Chinese government set up China Mineral Resources Group during the summer with around $3 billion in capital. Analysts have speculated that China may have formed the agency to challenge how the top iron ore producers control global prices.

BHP Group CFO David Lamont this summer said he was not worried about China's state agency managing world prices.

"Markets will sort out where prices need to be based on supply and demand," Lamont said during the Australian's Strategic Business Forum in July.

Steel Markets And China's Economy
The Covid-19 pandemic mangled global supply chains in many industries, including steel. As much of the world slogged through the crisis, demand for steel crashed. Steel demand started to pick up toward the end of 2020.

In 2021, U.S. steel prices skyrocketed to all-time highs, moving above $1,900 per short ton in August 2021. Prices fell into a lull early this year. They then surged to around $1,500 per short ton of hot-rolled coil (HRC) in April after Russia invaded Ukraine. Prior to the pandemic, HRC prices ran near $500 per ton.

On Friday, benchmark HRC steel futures were around $678 per short ton. China's steel rebar futures were trading at about $573.60 per ton Friday.

China stocks, after enjoying a more than monthlong rally, have dropped off as Covid cases in China appear to be increasing rapidly after the country eased its restrictive policies.

The eased restrictions on travel and quarantine, combined with reduced tracking ability due to the testing halt, left investors outside of China confused about how to monitor the world's second-largest economy heading toward the Chinese Lunar New Year in January.

Analysts are not expecting a quick turnaround for China's post-"zero Covid" economy. Many analysts stress caution, warning that it may take months to see how China's economy and markets respond to eased restrictions, Reuters reported Wednesday.