A few days ago, Brazil’s Vale stated that due to the recent drop in iron ore prices in China, the company may reduce its iron ore prices by 9% to 10% to US$135/t. This is part of the quarterly price adjustment based on the Chinese spot market price index.
As one of the world’s top three mining giants, Vale, this time publicly expressed its “deep meaningâ€. It seems to confirm to its Chinese customers that the pricing of the index implemented by the three major mines is very fair - “Ore prices will not only increase, but also Will drop."
It is undeniable that the price of this Vale is actually measured in accordance with the Platts Index. However, it is not difficult for people who are attentive to find that compared with the rate of nearly 30% increase in ore in the third quarter, the decline of 10% seems to be too perfunctory, and the ore price is being staged as a drama of “the rise is easy to fall hardâ€. It can be expected that the late steel mills will not only face tremendous pressure from weak market demand, but also a huge risk under the rules of the index pricing game.
Trap: No one smiles at such price cuts
However, no one can smile at such price cuts. Behind this seemingly fair pricing model is a more subtle "trap" set by the three major mines.
Xu Xiangchun, the director of the information network of my steel network, told the author that from the theoretical and practical aspects, determining the price based on the spot index is fair and reasonable, and it seems to reflect the changes in the market. However, it cannot be overlooked that this index pricing itself has many defects.
Xu Xiangchun analyzed that from the current operating conditions, the price of iron ore index is very rigid. Due to the monopoly of iron ore and the large domestic demand, once the price of steel rises, the price of iron ore will immediately increase and increase. On the contrary, iron ore prices are very strong when steel prices fall. Moreover, some high prices that have no volume at all have become an important factor in pushing up the average price of the index. From the quarterly pricing of iron ore this year, Vale said at the end of May that iron ore prices in the third quarter will increase by 35% from the second quarter to US$144 per ton, and this year, the company’s iron ore prices have risen. 170%.
“Only when there is indeed no trading volume will the iron ore price fall a little. Sometimes it may not wait for the ore to fall, steel prices will go up again, and the price of iron ore will go up again.†One would not disclose The person of the steel company of the name stated, “Sometimes, it is a little scary to see the price increase of steel, because the price of ore will rise immediately.â€
A set of data monitored by my steel network just proved this “defectâ€: In July, steel prices rose by 6.5% year-on-year, while iron ore prices rose by 63.5% year-on-year.
The relevant person in charge of the China Iron and Steel Association said in an interview with the author that the increase rate of iron ore and the increase rate of steel prices are fundamentally different from each other. The inequality between the upper and lower reaches cannot be sustained for a long time.
Not only that, neither Vale, nor BHP Billiton's chief executive Goreith, nor Alberto, the CEO of Rio Tinto, which has just visited China, have unanimously affirmed the Chinese market's driving effect on their performance, and they hold in their hands. The financial reports made China's steel mills more "enviable." According to BHP Billiton's fiscal year report issued last week, as of June 30 this year, BHP Billiton achieved a net income of US$12.7 billion in the current fiscal year and US$5.9 billion in the same period of 2009, a year-on-year increase of more than 100%. Not long ago, Rio Tinto’s financial report showed that net profit in the first half of the year was US$5.85 billion, which was a 2.6-fold increase from the same period last year. If calculated by basic profit, it will reach 5.8 billion U.S. dollars, an increase of 125% over the same period of last year. The quarterly report released by Brazil's Vale shows that in the first half of this year, the company's iron ore production increased by 34.5% year-on-year, and its net profit increased by 146.6% year-on-year.
At the same time, the overall profitability of domestic large and medium-sized steel mills continued to decline in July after the earnings contracted in June. Data from the China Iron and Steel Association revealed that in July, domestic large and medium-sized steel mills realized a total profit of 2.86 billion yuan, a decrease of 3.39 billion yuan month-on-month, a decline of 54.24% month-on-month, and a year-on-year drop of 73.05%. From January to July, the accumulated profits of large and medium-sized steel enterprises nationwide totaled nearly 53.71 billion yuan, which cannot be compared with the three major mines.
“This exactly reflects the monopoly position of the three major mines. At present, the implementation of index pricing for the three major mines is the best way to maximize profits,†said the relevant person in charge of the China Iron and Steel Association.
Anxious steelmakers wait for a new offer from the mine
In addition to production, seeing that it has entered September, many steel mills have been anxiously waiting for the mine's new offer. Because according to the previously set quarterly pricing game rules, the three major mines will determine the fourth quarter's ore price based on the average spot price index for June, July and August.
A senior steel plant executive in Central China confirmed to the author that at present, Vale has not received a quotation in the fourth quarter of Vale. However, he said that the quotation should come out in the near future. "It's just a matter of days." He said. According to previous experience, Rio Tinto will follow up with Vale's offer, and BHP Billiton's offer is still based on a variety of flexible pricing methods.
Although no official quotation was received, the above people also saw the recent position of Vale. "Similar to what we predicted before, it is estimated that the decline is also this level, the price will not be less than 135 US dollars / ton." The above people frankly.
Starting from May of this year, the domestic spot iron ore price experienced a sharp decline. From May to June, the drop ranged from 24% to 25%. Although there was a 13% to 14% rebound from July to August. However, from April to May this year, there are still more than 20 US dollars / ton gap, resulting in the third quarter of the long-term contract ore prices are always higher than the spot iron ore.
The steel mills with long-term supply agreements in most of the major mines and the three major mines have experienced a period of upside down prices. By the end of August, 62% of the spot iron ore cif price was about US$145/ton, which is still lower than the end of August. The Australian PB fines price is lower than USD 10/t.
However, the fall in spot prices will also reduce the price of the long association in the fourth quarter. Just recently, Brazilian media quoted Jose Carlos Martins, executive director of marketing, sales and strategic decision-making at Vale, Brazil, saying that the company plans to reduce iron ore prices by 10% from $150/ton to $135/ton in October. This is part of Vale's quarterly price adjustments based on the Chinese spot market price index. At the same time, Brazil’s second-largest iron ore producer, ferrous metallurgical company, also plans to reduce its iron ore price in the fourth quarter by 8% to 10% from the previous quarter to about US$140/ton, but this price is still higher than in 2009. Average price.
According to the above sources, due to the flexible pricing method, according to the company’s already established prices, the FOB price of Australian ore should average between US$125 and US$127/ton, according to Umetal’s iron ore analyst. Kay had previously estimated in the media that as of August 26, the average price of the index for the three months from June to August was US$139.6/ton, which was lower than the average of the previous three months, but it was not obvious during this period. The average freight from Australia to China is US$9/tonne, equivalent to US$10 per ton of dry freight. This simply estimates that the price of the Australian long association in the fourth quarter should be around US$128 to US$129/ton, which is approximately 11% lower than the price in the third quarter to 12%. .
Difficult steel enterprises can not be optimistic about the late operation
“The steel mills will still face the objective situation of surplus production and low steel prices. According to common sense, the price of iron ore should fall back.†An insider of the China Iron and Steel Association said to the writer that this may to some extent ease the later period. Pressure from steel mills, however, does not reverse the current difficult situation of Chinese steel mills.
"If we calculate the rate of reduction by 10%, that is, the price of iron ore per ton falls by 15 US dollars, and less than 200 yuan in the cost of steel, the mitigation effect on the pressure on the steel industry will be very limited," the source said. The author learned from the inside of a state-owned steel mill in Central China that because quarterly pricing has a time lag, the fourth quarter price reflects the operation of steel mills, and may be delayed by one and a half months to two months.
It is worth noting that, after three consecutive months of declining production, steel products have been affected by temporary rises in prices and a slight warming in the market, and steel production has risen. Steel mills that had previously cut production also began to gradually resume production. According to the latest data from China Iron and Steel Association, the daily output of crude steel in the country in early August was 1.719 million tons, an increase of 77,000 tons from the end of July.
Xu Xiangchun said that the current overall domestic steel market overcapacity, and the current price increase will lead to the company to produce blindly optimistic judgments on the market later, and continue to release production capacity, leading to continued market supply and demand conflicts continue to increase, while the domestic steel market demand in the third and fourth quarter Compared with the previous period, the growth rate has obviously slowed down. The market demand faced by steel mills is under great pressure. The room for the price increase of steel products in the later period is very limited, and will oscillate slightly under the influence of cost support.
Xu Xiangchun said, but the possible situation is that even if the steel mill is at a loss, the three major mines can continue to increase the ore price by increasing the sea freight and adjusting the supply volume. By then, the steel mills may face a more embarrassing situation.
During the recent online briefing session of Baosteel Co., Ltd. on 2010 semi-annual results, Ma Guoqiang, general manager of Baosteel Co., Ltd., said that he was “not optimistic†about the late-stage market. He believes that the company's iron ore cost in the fourth quarter will be lower than the third quarter, but the overall cost of iron ore in the first half of the year still has a substantial increase compared to the first half.
From the current point of view, Ma Guangqiang also stated that the company’s product demand in the second half of the year has decreased compared to the first half of the year. The decline in domestic demand and the adjustment of export tax rebate policy have brought about a reduction in exports, making domestic steel prices subject to the downside in the short term. pressure. The author learned from the China Iron and Steel Association that the domestic loss of large and medium-sized steel mills expanded rapidly in July. From the 14 companies in June, there was a single monthly loss, which rose to 28 in one move, including many industry leaders such as Shandong Iron and Steel, Guangzhou Steel, Ma Steel, Pangang, and Valin have all been on the list of loss-making companies.
At present, several listed steel companies are not optimistic about the performance of the third quarter. Among them, Anshan Iron and Steel Company expects that the single-quarter performance in the third quarter will be a loss of 450 million yuan to a profit of 150 million yuan. Three dawn of the steel industry believes that the single-quarter performance in the third quarter will fluctuate above the break-even line. GSC is expected to lose money in the third quarter.