Iron ore pricing mechanism has not broken steel elephant how to make room?

Xinhua Net Hai, Nov. 12 (Reporter He Xinrong) “The next year’s iron ore negotiations have already begun. The supply and demand sides are in the process of being approached.” A statement made by Luo Bing, executive vice president of the China Iron and Steel Association, before his birthday, aroused Many people imagine.

In 2010, the iron ore annual benchmark pricing system that lasted for more than 40 years collapsed and was replaced by the quarterly pricing of international mining. According to this model, the contract price in the next quarter will be from the spot price in the previous three months. The index is automatically determined without negotiations. In this regard, the attitude of China Steel Association from the initial boycott to the present is only "to be observed." What kind of new changes will the iron and steel industry in the dilemma bring back to the negotiating table?

Iron ore negotiations in 2011: pricing mechanism is more important than price

A set of data can show the dilemma of Chinese steel mills after quarterly pricing: In the first three quarters of this year, the average price of imported iron ore from China reached US$122 per tonne, a year-on-year increase of 56%. As a result, Chinese steel mills have seen 1303 in cost. Billion yuan, while the industry's total profit during the same period was only 64 billion yuan. In particular, in the third quarter, Brazil’s Vale’s net profit reached a record of US$6 billion, while China’s Anshan Iron and Steel Company lost 178 million yuan in the same period. Contrast between the two, Yang Siming, chairman of Nanjing Iron & Steel, said with emotion that "in the past it was the boss, and now is a mining worker in the mine."

It is this extreme imbalance in the distribution of benefits between the upstream and downstream of the industry chain that allows China Steel Association to sit down again at the negotiating table. How does the pricing mechanism change? Many domestic mills want to return to the annual association, but in mines, Vale is happy to maintain the status quo. BHP Billiton wants to further financialize iron ore and become an exchange product.

"It is basically impossible to return to the annual long-term association model." Analyst Hu Kai of the Associated Metals Network believes that financialization is an important trend in iron ore trading. Not only is there a push for mines, but some international financial institutions are also looking forward to giving birth. For instance, the Singapore Exchange launched the iron ore swap settlement contract for hedging last year. At the beginning, the number of participants was only about 30, and now there are more than 200, and the growth has been very good.

Obviously, in the game between the two sides, there is a great possibility that quarterly pricing will continue in the short term. In this regard, China Steel Association also has its own ideas: that is, in the choice of the index, from the reference spot ore price to the domestic steel price. In fact, this is the same raw material pricing model for the copper industry, which is also highly dependent on foreign minerals: the price of copper concentrate imported is less than the reasonable processing fee from the open London copper price. In this way, it ensures that every link in the industry chain has profits.

Controversy oversupply time of iron ore

In addition to seeking adjustments to the pricing mechanism, Chinese steel mills have another expectation that the supply and demand landscape of iron ore will change. Due to the high prices and the large profits, new iron ore development projects worldwide are constantly emerging. “From the medium to long-term perspective, if the existing projects are put into production as planned, the iron ore market will exceed supply in the future,” said Ma Guoqiang, general manager of Baosteel Co., Ltd., which represents many people’s opinions.

The domestic situation is also relatively encouraging. For example, the Ministry of Land and Resources announced that it will conduct large-scale geological prospecting operations in 21 provinces across the country and plans to invest 30 billion yuan to ensure that there will be a new shortage of mineral reserves such as iron ore during the 12th Five-Year Plan period.

The development of overseas equity mines and the increase in the self-sufficiency rate of domestic mines have made domestic steel mills suffering from high costs see a glimmer of hope. In an interview, the reporter learned that for the time when iron ore exceeds supply, many people have advanced from 2015 to 2012.

However, the real situation may not be so optimistic. “We agree with the view that iron ore will gradually exceed supply after 2012, but the premise is that the price of ore can maintain the current high of around US$160 per ton,” said Zhao Xiang Hubei, chief researcher of Shenyin Wanguo Iron and Steel Industry. In fact, according to Wu Zhi, general manager of Steel House, the production cost of China's domestic ore is mostly around 600 yuan per ton. If the international iron ore price is less than 90 US dollars, then more than half of the domestic mines will be in danger of stopping production.

Hu Kai also noted that many new iron ore projects are still being developed by the three major mines. If there are signs of oversupply, the three major mines can jointly control the pace of production. "In the end, the real problem with iron ore is not resource scarcity but monopoly."

In addition, we must also pay attention to some reduction factors in the supply of iron ore. “The most typical is the Indian mines. The annual supply to the Chinese market can reach 100 million tons with a market share of about 1/6. However, India’s steel industry is rapidly rising in recent years. India’s domestic demand for restrictions on iron ore exports In the long term, the reduction in export volume is an inevitable trend, said Xu Xiangchun, director of Beijing Steel Union.

How to Relocate Iron and Steel Elephants

Regardless of the adjustment of the pricing mechanism or the reversal of the supply and demand pattern, at least in the past two years, the cost of iron ore will hardly drop. At the same time, the era of low-speed growth of China's steel industry is approaching. In 2010, China's crude steel production is expected to reach 625 million tons, a year-on-year increase of about 10%. “In 2011, due to the slowdown in both infrastructure and real estate investment, we expect the increase in crude steel production to be only about 5%,” said Zhao Xiang E. This will be in addition to the special circumstances in 2008, the first time in the past decade, China's steel industry has seen a single-digit increase.

In the face of high costs and a slowdown in demand, the dual extrusion pattern, how should iron and steel elephants move? In fact, many companies have tried to solve this year. For example, Baosteel Co., Ltd. achieved a profit of 2.55 billion yuan in the third quarter, which was still better than expected, although it fell 16% year-on-year.

“In the third quarter, the contract mine price rose to the highest in the year. According to estimates, most steel products will lose money, but the actual situation is better than expected. This shows that the steel mills are not at a loss to cope with high ore prices. When we buy less, purchasing flexibility is greatly increased than before." Zhao Xiang E said.

Of course, there are companies left behind. For instance, Valin Iron and Steel did not grasp the rhythm of iron ore procurement for factor company Wuyuan Iron and Steel, causing a huge loss of over RMB 1 billion in the third quarter. “In the previous annual pricing, the major steel companies all stood on the same cost starting line. The difference in the future will be quite large, and thus put forward higher requirements for the refinement of steel mills.” Zhao Xiang Hubei believes.

In addition, because the sales profit rate is less than 3% and lower than the national industrial average, many steel mills are planning to enter the non-steel industry. For this kind of active adjustment, Xu Xiangchun’s opinion is: “If horizontal and cross-industry development, the risk is not necessarily less than steel. The ideal way should be to extend the vertical and horizontal chain in the industry to enhance the overall competitiveness.”

In this respect, a typical case is Germany's ThyssenKrupp. This former steel king has transformed into an outstanding integrated manufacturing enterprise by expanding downstream in elevators, auto parts and other fields.

Whether it is because of poor management or integration into the non-steel industry will help ease the problem of overcapacity in China's steel industry. If iron ore is the industry’s biggest external problem, the latter is the biggest concern.

“From 2003 to 2008, the iron and steel industry experienced an extraordinary development stage that closed its eyes and could make big money. From this perspective, the current low-profit environment is not a bad thing. This will force the steel industry to speed up adjustments. In 3 years, the development of the entire industry has shifted from 'high-speed extensiveness' to 'fine deceleration',” said an authoritative policy official.