Singapore: Beijing is forging ahead with plans to curtail Australian mining’s power over the iron ore sector despite its Foreign Ministry praising “positive developments” in the Australia-China relationship.

A new state-backed company, the $4.3 billion China Mineral Resources Group, was launched on Tuesday to centralise purchases of iron ore for the steel sector and increase China’s bargaining power. It will take leverage away from Australian giants BHP and Fortescue who have historically dealt with scores of smaller operators.

Chengde Iron and Steel company, 200 kilometres northeast of China’s capital Beijing Credit:Sanghee Liu

The shake-up is expected to result in two of the industry’s top executives, Yao Lin, the chairman of Chinalco and Guo Bin, executive vice president of China Baowu, leading the new group.

Australia exported $154 billion worth of iron ore last year, most of it to China, where it is a key ingredient in making steel and driving Beijing’s economic stimulus. But Chinese importers have long made unsubstantiated claims of price gouging by Australian exporters as prices galloped towards $US200 ($289) a tonne last year, adding $30 billion in tax revenue to the federal budget.

The demand has meant Australian iron ore exports have remained resilient despite Beijing hitting Australia with $20 billion in trade strikes on half a dozen industries over the past two years.

The relationship has since shown signs of stabilising as China considers dropping a ban on Australian coal after two high-level meetings with Labor government ministers since the election in May.

The Chinese Foreign Ministry says it has noted “positive elements” of Foreign Minister Penny Wong’s meeting with her Chinese counterpart Wang Yi in Bali a fortnight ago.

“China-Australia relations are presented with both challenges and opportunities,” spokesman Zhao Lijian said on Tuesday night. “We hope the Australian side can seize the opportunities, shape up a right perception of China, stay committed to seeking common ground while putting differences aside.”

But the Chinese government is now attempting to re-orientate its relationship with Australian iron ore which it sees as a strategic vulnerability.

A Chinese iron and steel industry expert who asked not to be identified due to the sensitivity of the issue said the China Mineral Resources Group was set up to restore order to the market.

“There are too many channels and entities for iron ore import that have led to weakened bargaining power of individual [players] and sometimes accompanied by price gouging,” he said.

“By setting up such a company, China can centralise a considerable part of entities and channels, reduce disorderly competition in the market, and improve bargaining power.”

Fortescue chief executive Elizabeth Gaines said the company maintained strong relationships with all its Chinese stakeholders.

“We will continue to work closely with our customers and other key stakeholders in China to ensure we continue to optimise our distribution channels to meet the needs of our long-standing customers and the Chinese steel industry,” she said.

Fortescue chief executive Elizabeth Gaines. Credit:Sanghee Liu

Commonwealth Bank analyst Vivek Dhar said China was particularly exposed to international iron ore prices given its small mines only produce 15‑20 per cent of the iron ore it consumes.

“Taking market power away from the likes of BHP, Rio Tinto, Vale and Fortescue is not a new idea in China,” he said.

“[But] China’s centralised approach to iron ore purchases is likely to be more successful now than two decades ago. That’s largely because of the recent consolidation among China’s state-owned steel producers.”

Dhar said the plan to centralise iron ore purchases was consistent with some of China’s other policy initiatives such as boosting iron ore supply domestically and abroad and increasing scrap steel usage. “These measures will also decrease the influence of the world’s largest iron ore exporters,” he said.

The China Mineral Resources Group will also have control of negotiations over Simandou, the world’s largest iron ore deposit in Guinea, Africa. The project has been beset by delays, technical difficulties and disagreements between investors but when completed could pose a threat to Australia and Brazil’s decades of dominance over the iron ore industry.

“The current multi-development or competition among Chinese companies has led to insufficient concentration of funds during the development process,” the Chinese steel industry expert said.

Dhar said the Simandou project was “the headline overseas project” that could see global iron ore trade lift meaningfully this decade.

BHP was contacted for comment.

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