China Scores Another Currency Win Over The U.S. Dollar

China’s drive to de-dollarize its trade with the rest of the world by replacing the U.S. dollar with its currency, the renminbi, has spread from into a commodity long dominated by the dollar, iron ore.

The win for China came after a bruising seven-month dispute with the world’s biggest mining company, Australia-based BHP.

Swapping Dollars For Renminbi

Until last month all iron ore sold by BHP to China was priced in U.S. dollars but in future a small amount will be sold in renminbi.

The breakthrough is very much the thin edge of a wedge which China has been trying to drive into its commodity purchasing arrangements with other countries for decades.

Displacing the dollar with the renminbi can also be seen in oil trading and in a surge of borrowing in the Chinese currency by international banks which was reported last week to have reached record levels.

According to London’s Financial Times newspaper U.S. banks, led by Goldman Sachs, have been attracted to China’s offshore debt market by low interest rates.

The shift is also seen as another example of investors and companies limiting their exposure to the uncertainties of doing business with the U.S.

What happened in iron ore is a small example of the shift underway in commodity markets which have traditionally traded most products in U.S. dollars despite China growing to be the world’s leading commodity consuming country.

What’s happened with iron ore can be traced to the creation by the Chinese Government of a new commodities purchasing agency, the China Mineral Resources Group (CMRG), which plays a central role in most commodity acquisitions for Chinese companies.

BHP, however, was determined to stick with direct sales agreements between its iron ore mining division and Chinese steel mill customers.

The stand-off which followed saw the CMRG steadily ratchet up pressure, including the banning of certain BHP products such as an ore grade called Jimblebar.

A breakthrough came when BHP’s retiring chief executive Mike Henry and his successor Brandon Craig met with Chinese officials in Beijing earlier this month with that encounter producing a new sales agreement which includes recognition of a Chinese ore pricing system and a modest price reduction.

Other Australian-based iron ore miners, including Fortescue and Rio Tinto, have long accepted Chinese pricing systems for part of their sales but BHP’s capitulation has sent a powerful signal to commodity markets that China is in charge.

The complex process of selling iron ore, which is never of uniform quality, is based on an index system which allows for iron content in ore and applies discounts for impurities which affect steel quality.

China was particularly concerned with the long dominant index of Platts, an arm of U.S.-based S&P Global, requesting that it be replaced with a Chinese measure, the Beijing Iron Ore Port Spot Price Index.

Discount For China

BHP’s acceptance of the Chinese index as part of the iron ore sale process includes an added sweetener for China’s steel mills, a 1.8% discount on material supplied by BHP.

The Chinese news service Caixin reported that the disputed Jimblebar ore is now sold on a mixed formula which features a 51% weighting in renminbi using the Beijing spot price index with final settlement converted into U.S. dollars.

More Chinese commodity imports are expected to be priced in renminbi as contracts fall due.