China’s Vertical Integration Backward into Iron Ore

Abstract

The rapid growth of China is one of the big economic events of recent years. China is increasingly sucking up raw materials throughout the world to feed its continually growing manufacturing sector. I particularly focus on the iron ore industry. Steel is the most basic manufacturing industry and China’s steel companies are not only importing the iron ore, it is “vertically integrating backward” into the iron ore business by going to Australia, Brazil and other part of world where are the sources of iron ore and buying up the iron ore and taking over the mining and production of it. Firstly, I made an assumption that China is following the ‘raising rivals’ price’ theory regarding vertical integrating behavior. In order to prove my hypothesis, I studied on China’s steel price and Brazil’s iron ore price. What is more, I compared China’s steel industry with the U.S, Japan and Korea to understand the differences and why China is doing this. During my research, I found out that Japan was raising the iron ore price while China’s steel price is also high. This is showing that China is indeed trying to vertically integrate. However, Japan is somehow hindering China from doing so. I also researched on 22 Australian iron ore miners and the cooperation relationship that they built with China and Korea trying to show which one of them is integrating backward more thoroughly into iron ore business overseas. The biggest difference is that rather than simply signing long-term contract with the iron ore companies China prefers buying stock from them and unlike Korea it is building relationships with relative smaller companies.