Settlement using RMB gains bigger ground in sector with BHP onboard

A growing number of overseas mines are carrying out yuan settlement for spot trades at Chinese ports, which is not only helpful for the wider application of the yuan in commodity settlement but also illustrates the importance of the Chinese market to global miners, analysts said.

Australian iron ore conglomerate BHP saw its first shipment of yuan-based spot trade iron ore dock at a port in East China's Shandong province on July 10. This demonstrates BHP's long-term commitment to the Chinese market, the largest iron ore importer in the world, and to the flexibility of its iron ore sales to better align customer demand with supply chain capability and support liquid and transparent markets to ensure the sustainable development of the iron ore market, the company said.

The seaborne and port-side markets are distinct and can coexist, while BHP looks forward to continuing to work with key stakeholders on industry-based solutions which support transparency and fair market access across both channels, said Jeremie Louis, BHP's vice-president of Iron Ore Marketing and Sales.

The vessel Vittoria loaded with iron ore from a mine in Western Australia arrived at Rizhao Port, China's major iron ore trading port, two weeks after departing Port Hedland, BHP said.

Shandong Port Group Co, the operator of Rizhao Port, said carrying out yuan settlement for spot trades at ports will also reduce the use of the greenback amid possible economic risks brought by huge exchange rate fluctuations to Chinese steel enterprises.

Zhu Yi, a senior analyst with metals and mining at Bloomberg Intelligence, believes the launch of the yuan-based trade in iron ore is an important step for the Australian company to get closer to the Chinese market, while balancing the possible risks and uncertainties from the US dollar considering the current US inflation increase.

"As China's yuan gains a foothold in iron ore deals, miners could raise the share of their sales using yuan settlement and more miners will join this trend to meet their Chinese clients' needs," Zhu said.

Zhu said she believes the yuan settlement of iron ore purchases shows how global miners value the Chinese market as global mining companies including Australia's Rio Tinto, BHP Group, Fortescue Metals, as well as Brazil's Vale, have all conducted yuan-denominated transactions in China during the past few years.

Brazilian mining giant Vale SA started regular yuan-denominated spot trading in 2017. Rio Tinto, the world's second-largest iron ore miner, started iron ore spot trading through Chinese ports in 2019.

The port-side transactions are all settled in yuan, contributing to about 14 million metric tons of the company's sales to China in 2021.China accounted for a record 57 percent of the 2021 global revenue of the Anglo-Australian metals and mining giant, while it is also anticipating more growth, investment and local partnership opportunities in China where it has had a presence for over 120 years.

Jakob Stausholm, chief executive officer of Rio Tinto, said China is massively important for Rio Tinto, which has also sustained the company's cash flow in the past few years.

For the last few decades, China has successfully positioned itself as an industrial hub of the world and Rio Tinto expects more cooperation with China, he said.

In April 2020, BHP agreed to a 100 million yuan ($14.6 million) sale with Chinese steel giant Baosteel and pledged to continue sales in yuan.

China is the world's largest steel producer and biggest iron-ore consumer, yet it lacks pricing power due to its reliance on imported iron ore for more than 70 percent of its needs, said Zhu from Bloomberg Intelligence.

"China aims to reduce its reliance on imported iron ore to increase pricing power and as a step toward achieving carbon neutrality by 2060. The yuan settlement could be one of the important steps," she added.

While the US dollar is still the main currency for the iron ore trade at the moment, Wang Guoqing, research director at the Beijing Lange Steel Information Research Center, said yuan-settlement trade will also enhance the bargaining power of domestic iron and steel enterprises on iron ore prices.