China is too big a customer for BHP Group Ltd (LSE:BHP, ASX:BHP)to fall out with for long. But that has not stopped a spat from making investors nervous.
UBS highlights reports that CMRG, the state-run trader representing more than half of China’s steel mills, has told domestic buyers to halt purchases of BHP iron ore while a pricing dispute rumbles on.
The disagreement centres on how adjustments for ore quality and impurities are priced into long-term contracts. BHP has kept its counsel, while the Australian prime minister has urged both sides to sort things out quickly.
The immediate risk is not trivial: Jimblebar fines, the ore type named in an earlier stop order, account for about 20% of BHP’s sales mix.
China takes roughly 85% of BHP’s Pilbara shipments, making it more exposed than Rio Tinto, which sells nearer 79% into China, and certainly more so than Vale, which has been helped by warmer Brazil-China ties.
UBS’s shipment data suggests the impact so far has been modest, but not invisible. BHP’s exports dipped 6% year on year in August and 2% in September, compared with a flat first half. Its share of Australian iron ore arrivals in China has slid from 32% to 26% over the past six weeks, with Rio and Fortescue faring better.
Some of this is explained by planned maintenance at Port Hedland, including an overhaul of a car dumper and work on the rail network, but UBS warns it bears watching.
The broker keeps its 'neutral' rating and 2,100p target, with the shares at 2,066p. The bigger point is that the dispute underlines BHP’s reliance on a single customer base.
China needs Australian ore, but the balance of power in negotiations is shifting as Beijing centralises buying. Even if this ban proves short-lived, the episode is a reminder of where the leverage lies.