Baosteel is a modern steelmaking corporation with a long-standing import-oriented iron ore strategy. Currently, almost 100 percent of Baosteel's iron ore needs are obtained from imports. This strategy has never changed and is likely to continue for a long time unless great changes occur in China's domestic iron ore supply situation. Namely, without the discovery of new high quality iron ore resources within China and in the absence of efficient transportation, Baosteel will undoubtedly have to depend on imported iron ore far into the future.
It is a fact that the most of China's domestic iron ore resources are not of high quality. Although local supplies of iron ore have increased sharply on the back of the huge steel demand, the ratio of local supply to imports has dropped remarkably. In 2005, local iron ore accounted for around 54 percent of total supply in China. In 2006, this figure dropped to around 45 percent, due to the remarkable increase in iron ore imports.
Against the background of the sustained increase in China's iron ore imports, Baosteel has been the country's biggest iron ore importer. In 2006, China imported a total of 326 million tons of iron ore. Over 42 million tons of this figure were imported by Baosteel, accounting for nearly one eighth of China's total.
Thus far, Baosteel has imported most of its iron ore from Australia and Brazil, receiving almost two thirds of its imports from the former and one third from the latter. As to another important global source of iron ore, i.e. India, Baosteel only makes occasional purchases from there and so the quantities may be ignored.
Baosteel has three major iron ore suppliers: BHP, Rio Tinto and CVRD. These are also the top three iron ore suppliers in the world. In Australia, Baosteel has established close ties with BHP and Rio Tinto, signing long term iron ore supply cooperation agreements with these two giants. Currently, 60 percent of Baosteel's iron ore imports from Australian are from BHP. However, this situation is expected to change.
In March of 2007, Baosteel signed another important long term supply agreement with Australian iron ore corporation Fortescue Metals Group (FMG). Although FMG is just a newcomer compared to BHP and Rio Tinto, its iron ore resources and the opportunities its presents for joint investments finally succeeded in persuading Baosteel after three years of contacts. According to the bilateral agreement, when FMG starts to mine its iron ore resources in 2008, Baosteel will probably purchase five million tons of high quality ore from FMG, namely 11 percent of the expected total first year output of 45 million tons. With the increase in FMG's output, Baosteel's annual purchases are expected to reach 20 million tons. Furthermore, according to another signed memo, the two parties will together invest in and develop a new magnetite mine in Australia, which has an estimated minimum one billion tons of reserves. For this purpose, a new 50-50 joint venture is expected to be agreed.
Besides Australia, Baosteel has also been giving significant attention to Brazil and Africa in its search for iron ore resources. In Brazil, since most iron ore resources are controlled by CVRD, it is difficult for Baosteel to achieve its investment aims there. So far, Baosteel has made moves towards the establishment of a steelmaking mill in Brazil in cooperation with CVRD, thus hoping to gain indirect access to iron ore supplies. However, there are still many difficulties facing the cooperation of these two giants and the result has not yet become clear.
Baosteel's iron ore development plans in Africa will be worth waiting for. Although there has not been remarkable progress to date, in 2006 Baosteel began talks regarding future cooperation with some African countries which hold potentially-rich iron ore resources. The response from the African countries was positive.
Baosteel has announced a steel output target of 50 million metric tons for 2012. This means its current output will be doubled over the coming five years. Consequently, Baosteel's demand for iron ore will inevitably see a rapid increase during the period in question. In conclusion, we may expect a significant increase in tempo in Baosteel's moves towards investment in and development of overseas iron ore resources.