Should Aussie miners be selling iron ore in yuan?


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.

“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.

…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.

Hmm…not a very good idea:

  • if the US were to escalate into SWIFT or other financial sanctions then Big Iron is exposed to severe sovereign risk from the US;
  • leaving money in yuan in China exposes Big Iron to severe sovereign risk from China.

Finally, AUD has been weaker versus USD than CNY has for a decade:

So it might hit earnings barring hedges.

I guess they are doing it owing to some nasty arm-twisting which they would be sensible to resist.

David Llewellyn-Smith

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