BHP risks US$2 billion hit from dispute with state-owned mining firm CMRG
This comes after China restricts the group’s Jimblebar iron ore, as discounts widen and lump premiums collapse
[BEIJING] BHP Group could face up to a US$2 billion hit from pricing pressures after China restricted its Jimblebar iron ore, as the discounts widen and lump premiums collapse, said Goldman Sachs Group.
This could lead to a roughly US$1 billion a year loss from incremental discounts on the company’s major iron ore fines products at spot prices, analysts led by Matt Greene wrote in a Tuesday (Jan 27) report.
The group’s revenue could be reduced by a further US$1 billion due to the discounts on lump products, with Newman Lump discounts driving an 80 per cent fall in premiums paid on the product.
China implemented the curbs in September as part of the country’s push to gain greater bargaining power with the world’s top iron ore suppliers, arguing that its vast steel industry should secure better terms.
The move, carried out through state-backed China Minerals Resources Group (CMRG), is changing how the prices are set in a market long driven by seaborne benchmarks, the report added.
Goldman cautioned that its estimates are not a full proxy for realised prices given product mixes, timing lags and contract terms, but said that the analysis provides a framework for assessing the pricing dynamics now in play.
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A spokesperson for BHP declined to comment. The company said on Jan 20 that it is still negotiating the annual contract terms with CMRG.
“Our conversations suggest the ban is expected to extend (till) Chinese New Year,” the analysts said. “BHP is absorbing a pricing hit now, but maintaining its preferred pricing framework may preserve greater value over the long run.”
The Chinese ports have been dealing with elevated Jimblebar inventories since the curbs took effect, while some cargoes are struggling to find buyers and are being diverted to other markets.
The fall in premiums in the lump market has also led to a shift in the pricing of Pilbara Blend Lump produced by Rio Tinto Group, the analysts said, adding that this could present a potential US$1.2 billion hit to the company’s revenue as well.
A spokesperson for Rio Tinto declined to comment. BLOOMBERG
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