China’s yuan gains foothold in iron ore deals, could increase Chinese self-reliance, analysts say

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Iron ore miners‘ and steel producers’ increasing use of the Chinese yuan will increase its internationalisation, reduce China’s vulnerability to any possible US financial sanctions, and help the domestic economy in line with the new “dual circulation” strategy.

By using the yuan rather than the US dollar to price iron ore, this will increase the internationalisation of the Chinese currency and so reduce China’s vulnerability to any possible US financial sanctions.

Using the yuan for domestic sales will also reduce volatility in iron ore prices and improve the resilience of the domestic economy, in line with the government’s new “dual circulation” strategy, analysts added.

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“This will enable Chinese steel mills to have a bigger say in iron ore pricing. Chinese steel mills will be able to minimise their exchange rate risks, as the vast majority of steel they produce is consumed in China,” MySteel senior analyst Li Hongmei said.

“This will also help China internationalise its [yuan-denominated] iron ore derivative contracts on the Dalian Commodity Exchange.”

Rio Tinto and Vale, as well as rival Australian iron ore giants BHP Group and Fortescue Metals, have all confirmed they recorded their first yuan-denominated iron ore transactions in China in the last 12 months.

In October 2019, Rio Tinto agreed to be paid in yuan for a shipment to a steel mill in northern China’s Shanxi province, while in November, Vale struck its first yuan-denominated sale with the trading arm of Shandong Laigang Yongfeng Steel. It also agreed other yuan-priced deals with China Baowu Group and Hesteel earlier this year.

In May, BHP agreed a 100 million yuan (US$14.6 million) sale with Chinese steel giant Baosteel and pledged to continue sales in yuan, while Rio Tinto closed a 100 million yuan shipment to Ansteel last month, while Fortescue Metals started yuan-based ore sales in July.

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Last week, Australian-based Rio Tinto, the world’s second largest iron ore miner, also struck a deal with Ningbo Zhoushan Port Group to open a facility at its Beilun port to blend different grades of iron ore to meet specialised demand from more steel mills in the Yangtze River Delta and South China.

Miners blend iron ore to provide the target grade of the material that is suitable for each steelmaker’s production.

It is Rio Tinto’s first portside ore blending service in the Yangtze River Delta and in the southern part of China, as it expands beyond its existing centres at ports in northern and central China, the company said on its WeChat messaging account.

On the same day, Brazilian miner Vale also agreed a deal with Ningbo Zhoushan Port Group to open its first portside grinding hub – a process of breaking down ore into certain sizes suitable for making steel pellets with three production lines to process iron ore at the Shulanghu Ore Transfer Terminal in Zhoushan City in Zhejiang province.

The new facilities are aimed at attracting more business from speciality customers by offering them the flexibility of smaller volumes of blended iron ore with shorter lead times.

This, in turn, points to a further rise in iron ore sales, an increasing amount of which are likely to be yuan-denominated, according to analysts.

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Navigate Commodities managing director Atilla Widnell agreed yuan-pricing was a natural commercial move for iron ore miners to increase sales in China, but just as importantly, it was also another strategy for China to reduce iron ore pricing volatility.

Yuan-pricing will protect China’s domestic economy and increase its self-sufficiency, the goal of the “dual circulation” strategy announced by President Xi Jinping in May, said Heng Wang, co-director of the China International Business and Economic Law Centre at the University of New South Wales.

The yuan, though, remains a relatively minor player on the international stage. In July 2020, the it retained its position as the fifth most active currency for global payments by value, with a share of 1.86 per cent, according to international payments messaging service SWIFT.

The new “dual circulation” strategy aims for China to rely more on its domestic economy and technological innovation given rising difficulties in the international environment without sacrificing exports or pausing the opening up of the domestic economy to foreign businesses.

“China has strived to promote the yuan for a long time. The current US-China tensions may make [yuan] internationalisation more important for China,” Wang said.

“Trade may be one way to promote the use of the yuan. It does depend on how other parties are willing to use this currency.”

Last month, Xi vowed to use the development plan for the Yangtze River Delta region to showcase the “dual-circulation” strategy.

He highlighted the need to break down administrative barriers, enhance policy coordination and allow the easier flow of land, labour, entrepreneurship and capital in the region.

The Yangtze River Delta development blueprint includes Shanghai and the neighbouring provinces of Anhui, Jiangsu and Zhejiang – an area which accounts for a quarter of China’s gross domestic product.

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