Consecutive Rises in Iron Ore Prices Cause Anxiety and How to Solve Excessive Dependence on Imports?

SHANGHAI, Feb 22 (SMM) - Iron ore prices have risen for a while amid strong ferrous metal market. Iron ore futures prices remained high yesterday, with the most-traded 2301 iron ore contract closing with gains of 3.43% at 919 yuan/mt.

The transaction prices of PB fines in Shandong were mainly 913-915 yuan/mt yesterday, which was 8-20 yuan/mt higher than the previous day, while the PB fines in Tangshan were sold at 925 -927 yuan/mt, up 18-22 yuan/mt.

The continuous sharp rise in iron ore prices has once again aroused great attention. On February 17, DCE issued a risk warning announcement, reminding the great fluctuation in iron ore prices to ensure the stable market. On February 21, DCE made another move and issued an announcement saying that since the night trading session on February 21, the new openings of iron ore futures contracts placed by non-futures company members or customers will be limited.

China's Development and Reform Commission took measures against iron ore price surge in 2022

At the beginning of 2022, in response to the sharp rise in iron ore prices, the National Development and Reform Commission has repeatedly emphasized strengthening the supervision and control of iron ore prices.

On January 28, 2022, relevant analysis believes that the current iron ore market supply and demand is generally stable, the domestic inventory is at multi-year high, and the recent quick price hikes are the result of speculation. The National Development and Reform Commission paid close attention to the price changes in the iron ore market, and conducted in-depth investigations with relevant departments, strengthened supervision, cracked down on illegal activities such as spreading false information, price gouging, and malicious speculation, and took more effective measures to effectively ensure stable iron ore prices.

On February 9, 2022, the Price Department of the National Development and Reform Commission and the Price Supervision and Competition Bureau of the State Administration for Market Regulation jointly interviewed relevant iron ore information companies and asked for the factual source of the information. They also remind and warn relevant enterprises that they must carefully verify and be accurate before releasing market and price information, and must not fabricate and publish false price information, or inflate prices. The National Development and Reform Commission and the State Administration of Market Supervision paid close attention to changes in iron ore prices, and will further studied and took effective measures to ensure the stable operation of iron ore market. At the same time, market supervision was strengthened, and violations of laws and regulations such as fabrication and distribution of price hike information and price gouging will be punished as soon as they are discovered.

On February 11, 2022, in response to the recent changes in iron ore prices, the Price Department of the National Development and Reform Commission and the Price Supervision and Competition Bureau of the State Administration of Market Regulation planned to dispatch a joint research team to some commodity exchanges and key ports to carry out iron ore market supervision and research. The research team planned to understand the recent changes in iron ore inventories and the participation of relevant companies in iron ore futures spot trading, listening to relevant parties on strengthening the joint supervision of the futures spot market, and severely punish those who fabricate and spread price hike information, hoard to speculate, inflate prices, etc.

On February 28, 2022, National Development and Reform Commission promised to take effective measures to strengthen the regulation and supervision of iron ore prices. Recently, the market prices of iron ore have risen sharply, and there have been many abnormal fluctuations during this period. Relevant analysis believes that the current iron ore market supply and demand is generally stable, the domestic inventory is at multi-year high, and the recent quick price hikes are the result of speculation. The National Development and Reform Commission pays close attention to the price changes in the iron ore market, and will conduct in-depth investigations with relevant departments, strengthen supervision, crack down on illegal activities such as spreading false information, price gouging, and malicious speculation, and further take effective measures to effectively ensure stable iron ore prices.

Looking back at the trend of iron ore prices in 2022, the National Development and Reform Commission expressed its high concern for the iron ore market price for the first time on January 28, which coincided with the Chinese New Year (CNY) holiday. After the prices closing up sharply by 7.59%, the market fully digested the news during the CNY holiday, hence the remark did not have a significant impact on the market after the CNY.

On February 9, 2022, iron ore information companies were interviewed and they were asked not to spread false news. Iron ore fell 5.90% in response, but rose again by 3.20% the next day. Therefore, on February 11, 2022, the National Development and Reform Commission dispatched a joint research team to monitor the iron ore market.

Then the iron ore price rally stopped, and fell 14.91% to 685 yuan/mt. Since then, iron ore prices remained volatile

However, on February 28, 2022, National Development and Reform Commission promised to take effective measures to strengthen the regulation and supervision of iron ore prices, then interviewed iron ore information vendors again. But the impact on iron ore market was not immediately reflected.

On the same day, iron ore closed up 2.69% and hit a half-year high of 870 yuan/mt, then started to fall.

Since November 2022, iron ore prices rebounded again amid the favourable macro front as the domestic pandemic control policies were optimised. Meanwhile, the stimulus policy of real estate landed smoothly, which led to a bullish outlook among the steel market.

In December 2022, the favourable macro form extended and the restocking demand was released, hence the iron ore prices were boosted further and hit the highest point at 867.5 yuan/mt on the last trading day of 2022. However, at the beginning of 2023, the iron ore prices declined slightly under the weak fundamentals. On January 9, 2023, under the influence of the National Development and Reform Commission holding a meeting to study the iron ore price supervision, iron ore prices fell sharply. But then iron ore ushered in four consecutive rises. As of the close on January 13, iron ore prices rose by 3.40% to 881 yuan/mt, setting a new high in the past six months.

On January 16, the National Development and Reform Commission interviewed iron ore information vendors, and remind and warn relevant enterprises that they must carefully verify and be accurate before releasing market and price information, and must not fabricate and publish false price information, or inflate prices. As such, iron ore prices fell 4.31% in response and continued to fall the next day.

On January 18, the Price Department of the National Development and Reform Commission, the Price Supervision and Competition Bureau of the State Administration for Market Regulation, and the Futures Department of the China Securities Regulatory Commission warned relevant iron ore trading companies and futures companies not to fabricate and spread price increase information and not to speculate excessively. But the market did not react much to the news. Iron ore prices continued to rise and as of the close on January 20, iron ore prices stood at 865 yuan/mt.

After the Chinese New Year holiday, the favourable policy boosted the real estate industry. However, steel mills still maintain a low raw material inventory in the case of poor profits. With the improvement of future demand and the further resumption of steel mills, restocking demand for iron ore drove up the prices.

Rising iron ore prices pose challenges to steel industry recovery

Iron ore is one of the important raw materials for the steel industry, but domestic iron ore supply mainly relied on imports. Statistics show that China's imported iron ore has accounted for 80% for many years.

The distribution of iron ore in the world is relatively concentrated. According to statistics, the world's available iron ore reserves are about 180 billion mt, of which Australia has the largest reserves with about 51 billion mt, accounting for about 28.33% of the world's total reserves. Brazil, Russia and China have reserves of more than 70%.

Due to the insufficient supply and low grade, China’s iron ore supply is highly depended on imports.  China's imports in December 2022 stood at 90.86 million mt, a decrease of 8.08% month-on-month, but an increase of 5.56% year-on-year. The imports totalled 1.11 billion mt in 2022, a month-on-month increase of 8.93% and a year-on-year decrease of 1.5%.

China's iron ore imported from Australia and Brazil reached 59.8124 million mt and 20.0663 million mt respectively in December 2022, accounting for about 66% and 22%. The rise in iron ore prices increased the concentration of the supply side. It is expected that China will remain the world's largest importer of iron ore in the next 5 to 10 years.

The rapid and sharp rise in iron ore prices has brought multiple impacts on downstream industries. Firstly, the production costs of the steel industry has been greatly increased as the iron ore prices accounts for more than half of the production cost of steelmaking. Secondly, the increase in cost will be transmitted downstream along the industrial chain, which may cause downstream price increases. Thirdly, the sharp rise in iron ore prices has eroded the profits of the real economy to a certain extent. Financial capital raises the prices of iron ore through financial pricing mechanisms such as futures and swaps. In fact, it transfers profits through price leverage, allowing the domestic real economy to subsidise overseas mines and financial capital.

High raw material prices erodes the profits of domestic enterprises

The member enterprises of China Iron and Steel Association achieved an operating income of 6.59 trillion yuan, a year-on-year decrease of 6.35%; total profit was 98.2 billion yuan, a year-on-year decrease of 72.27%.

In 2022, the external environment facing the development of China's iron and steel industry was extremely severe, and the operation of the industry encountered greater difficulties and challenges. The overall operation trend of "weakening demand, falling prices, rising costs, and declining profits" has emerged.

According to data from the China Iron and Steel Association, in 2022, the procurement cost of imported iron ore (fines) for benchmarking steel mills decrease 24.16% year-on-year. The procurement cost of coking coal increased 24.91% year-on-year, creating greater pressure on the cost reduction plans of steel mills. Under such conditions, various steel mills have vigorously carried out activities to reduce costs and increase efficiency, and thus manufacturing costs have dropped. The cost of steelmaking for benchmarking steel mills has dropped 4.63% throughout the year.

Baogang Groupannounced on January 30 that the company expects a loss of 670 million to 1 billion yuan in 2022, and a net profit of 2.87 billion yuan attributable to the parent in the same period last year. In 2022, due to fluctuations in fuels and steel prices, and the impact of the pandemic, the gross profit margin of the company's main steel products dropped sharply.

On January 30, XinSteel Co. released its annual forecast, stating that the net profit attributable to shareholders of listed companies is estimated at 1.02-1.23 billion yuan, a year-on-year decrease of 71.58-76.42%.

Bensteel Plate Product Co., Ltd. released its 2022 annual forecast, stating that the net profit attributable to shareholders of listed companies is estimated at 1.09-1.33 billion yuan.

Liuzhou Iron and Steel issued a performance forecast expected that the net profit attributable to owners of the parent company in 2022 will be -1.98-2.68 billion mt.

Taigang Stainless Steel released a performance forecast and estimated that the net profit attributable to shareholders of listed companies in 2022 will be 130-165 million yuan, a year-on-year decrease of 97.39- 97.94%. Basic earnings per share will be 0.023-0.029 yuan. 

On January 31, Angang Group released its 2022 annual forecast, stating that the net profit attributable to shareholders of listed companies is estimated at 156 million yuan, a year-on-year increase of 97.76%.

Hunan Valin Iron&steel issued a performance forecast on the evening of February 14. It is expected that the net profit attributable to the parent company in 2022 will be 6.2-6.6 billion yuan, a year-on-year decrease of -36%.

On February 21, Jinzhou Pipeline released its 2022 performance report, stating that the company achieved operating income of 6.09 billion yuan in 2022, a year-on-year increase of 13.52%, and the net profit attributable to shareholders of listed companies was 235 million yuan, a year-on-year decrease of 39.18%. The company stated that the falling profits were caused by poor logistics and increasing costs.

Ministry of Natural Resources has lunched a new round of prospecting for iron ore

In March 2022, China Iron and Steel Association revealed that "the 'Cornerstone Plan' proposal aimed at strengthening resource security has been reported to 4 ministries and commissions including the National Development and Reform Commission. The "Cornerstone Plan" suggest to use 2-3 "five-year plans" to effectively change the source composition of China's iron resources, fundamentally solve the problem of resource shortcomings in the iron and steel industry chain,so as to reduce iron ore Stone foreign dependence.

On January 11, 2023, the National Natural Resources Work Conference held by the Ministry of Natural Resources proposed that a new round of domestic prospecting for strategic minerals should be fully launched around strengthening the domestic exploration and development of important energy mineral resources and increasing reserves and production. According to the National Mineral Resources Planning (2016-2020), a total of 24 minerals have entered the catalogue, including energy minerals such as oil and natural gas, metal minerals such as iron, chromium, and copper, and non-metallic minerals such as phosphorus and potassium salts.

According to industry insiders, the above-mentioned domestic prospecting action by the Ministry of Natural Resources is a continuation of the "Cornerstone Plan” proposed by the China Iron and Steel Association, which aims to increase the self-sufficiency rate of iron elements in the domestic steel industry. This action once again demonstrates that China attaches great importance to ensuring the supply of national strategic resources, and will play a positive role in promoting the development of domestic mineral resources and the contribution rate of iron element in production.

However, this is not something that can be accomplished in a short time as it generally takes about 3 years of construction and development period from mine construction to production. Continuous policy support is needed during this period.

Fundamentals and Market Outlook for Iron Ore

Affected by the optimised domestic pandemic prevention and control measures, the intensive introduction of domestic stimulus policies, and the slowdown of interest rate hikes by the Federal Reserve, the iron ore market outlook improved after the Chinese New Year. Downstream steel mills have resumed work, and pig iron output has continued to increase. According to the 120 major domestic steel mills surveyed by SMM, the output of pig iron continued to increase slightly in January, totalling 48.69 million mt, an increase of 140,000 mt or 0.3% from December 2022.

SDIC Anxin Futures analysts said that the recent rise in iron ore prices was mainly caused by optimistic expectations of improving terminal demand. At present, the favourable policy has boosted the real estate industry. However, steel mills still maintain a low raw material inventory in the case of poor profits. With the improvement of future demand and the further resumption of steel mills, restocking demand for iron ore drove up the prices.

The supply of iron ore increased. According to SMM research, the total global iron ore shipments stood at 27.07 million mt last week (February 11-17), up 7.8% on the week. Among them, the imports from Australia to China rose 4.3% from the previous week, and that from Brazil decreased 5.5% on the week. According to SMM research, domestic iron ore arrivals recorded 28.52 million mt, down 1.06% on the month.

As of February 17, iron ore inventories across 35 ports tracked by SMM totalled 137.11 million mt, an increase of 1.02 million mt from the previous week but down 16.53 million mt year-on-year.

However, due to the slow recovery of terminal demand, the steel mills actively picked uo goods from ports, and the daily average shipment rose 79,000 mt on a weekly basis to 3.03 million mt this week.

According to SMM survey, the average operating rate of blast furnaces stood at 92.12% last week, up 0.45 percentage point from a week ago. The daily average pig iron production of sample steel mills was 2.22 million mt, an increase of 12,300 mt. The daily production across China is estimated at 2.65 million mt, up 14,700 mt on the week. And according to SMM's prediction, the subsequent resumption of blast furnace production will still increase.

In addition, the current iron ore spot market was active as traders shipped actively and steel mills purchased on demand.

At present, the prices of iron ore were still affected by the macro front as the supply remained tight amid slow recovery of output. Driven by the rebound in downstream demand, the market sentiment improved and the demand for raw materials picked up. However, considering the high inventory of finished products in steel mills, steel mills are unlikely to increase the production in the short term. Coupled with the losses caused by rising iron ore prices, steel mills were less willing to purchase.

For the market outlook, Liang Haikuan, a researcher at Founder, said that it is necessary to pay attention to the implementation of strong expectations amid the continuous increase in social inventory of steel products. If the recovery of terminal demand is not as good as expected, the ferrous metal market may under pressure. At the same time, judging from the credit and social financing situation in January, residents’ willingness to save is still strong while their willingness to invest and apply loans is relatively weak. It will take time for the real estate sales to improve, and iron ore prices are unlikely to increase further. Looking forward to the first quarter in 2023, SMM believes that iron ore prices may remain volatile. First of all, China’s various favourable policies made the market maintain high expectations for the demand in the steel market. In addition, the restocking demand after the Chinese New Year holiday and the seasonal low of overseas shipments led to tight supply. But the market should pay attention to the supervision and price control measures taken by the Development and Reform Commission.