China set for iron ore trading shake-up

China is poised to scrap a decade-old licensing regime for iron ore importers in a move that should open up the world’s largest iron ore market to greater competition.

The step should lower costs for hundreds of smaller steel mills across the country.

But the expected abolition will be bad news for the handful of large state-controlled companies that currently hold iron ore import licences as they will no longer be able to profit from selling ore on to smaller competitors.

“All the large import traders are already preparing for the cancelling of the licence system, which should come at the end of June or start of July,” said Zhang Jiabin, head of the iron ore bureau at Umetal, a Chinese steel consulting company.

“Chinese import traders and steel mills that act as iron ore agents will suffer a heavy blow.”

A director in the liaison department of the China Chamber of Commerce for Metals, Minerals and Chemicals Importers and Exporters (CCCMC) told the Financial Times that he expected the licensing system to be abolished in July.

Another director from the iron ore department of CCCMC said he could not answer questions related to the expected change.

Under the new rules, iron ore traders will only need to apply for the same kind of licence that is issued to other importers and the procedure will be relatively straightforward, industry experts said.

In addition to throwing open the old licensing system to allow far more companies to import iron ore, the new regulations should also allow many more Chinese players to invest in overseas assets and deposits.

This could potentially lead to a scramble among China’s steel producers as they scour the planet looking for upstream supply.

China imports about two-thirds of the world’s international iron ore trade and last year the country imported a record 743m tonnes, up 8 per cent from a year earlier.

The licensing system was originally introduced by Beijing in an attempt to strengthen and unify the country’s negotiating position in relation to the largest global miners like BHP Billiton, Vale and Rio Tinto, that dominate iron ore trade.

But the system created distortions and pushed up prices by allowing large state players to act as middlemen and take a large cut when supplying domestic competitors.

Some industry analysts warned that changes to the current system could take time because they still face some opposition from within the Chinese bureaucracy.

“Don’t expect this change to happen tomorrow, the abolition of the current system will be a process,” said Ma Zhongpu, an analyst at consulting company China Commodity Marketplace. “[The authorities] want to improve management of the iron ore market but they can’t possibly abolish the current system when they don’t yet have a new model in place.”

Still, while it may take longer than some in the industry forecast, the decision appears to have been made to get rid of the current system.

Additional Reporting by Li Wan