Why is the price of iron ore high due to sluggish demand for downstream steel?|Looking back on 2023(13)

Interface News Reporter | Wang Yong

Interface News Editor |

From the optimistic expectations of the market after the change of the epidemic prevention policy, to the final disappointment, the power of the traditional peak season "Golden September and Silver Ten" is obviously insufficient, constituting a dismal year for the steel industry.

"In 2023, the profitability of the steel industry can be said to be the worst year since the beginning of the new century. Xu Xiangchun, information director of Shanghai Ganglian, said in an interview with a reporter from Jiemian News.

Compared with the harder crude steel "flat control" or "reduction" in previous years, this year's national crude steel flat control document has not landed, and the signal of crude steel flat control is weak.

According to data from Shanghai Ganglian, the crude steel output from January to November was 952 million tons, a year-on-year increase of 1.5%, and the annual output is expected to be 1.03 billion tons, an increase of 1.5%.

This result obviously broke the tone of "flat control", and it also means that this year's so-called "flat control" policy is in name only. As domestic steel demand is still weak, on the one hand, it has increased the sales pressure of downstream steel, prompting steel prices to fall, and on the other hand, it has supported the rise in the price of iron ore, a raw material in the upstream.

The crude steel production flat control policy refers to a series of measures taken by the government to limit or control the growth rate of crude steel production. In 2022, crude steel output was 1.013 billion tons, down 1.9% year-on-year.

The continued slump in steel prices and the firmness of iron ore prices have squeezed the profits of China's steel industry in 2023, and the overall profitability of the steel industry has declined.

According to the data of Shanghai Iron and Steel Union, from January to November, steel prices fell by an average of 10%, of which rebar fell by 13.5%, hot-rolled coil and medium plate fell by 10%, cold plate fell by 5.6%, coking coal fell by 21%, and iron ore prices rose by an average of 6%. On the whole, the cost of raw materials fell by 376 yuan/ton, and the average annual price of steel fell by 470 yuan/ton, which exceeded the decline of raw materials.

In the same period, the average gross profit per ton of steel for rebar, hot coil and cold rolling was -159.6 yuan/ton, -139.8 yuan/ton and 96.2 yuan/ton respectively, which was 337.7 yuan/ton, 277.2 yuan/ton and an increase of 10.4 yuan/ton respectively compared with the average gross profit per ton of steel in 2022.

On top of the volume of more than 1 billion tons of crude steel production, Shanghai Ganglian expects the profit of the steel industry to be 40 billion to 50 billion yuan in 2023.

"In 2001, when the crude steel output was only 150 million tons, the profit of the steel industry was 20.2 billion yuan, and in 2015, before the supply-side reform, the profit was 52.6 billion yuan. Xu Xiangchun expressed concern about the current profitability of the steel industry.

According to the survey of Shanghai Iron and Steel Union, the loss ratio of 247 process steel mills will fluctuate by 35-85% in 2023, with an average of about 60% throughout the year.

Profits are generally severe, but steel mills are reluctant to take the initiative to reduce production. "Relying on industry self-discipline, it is not feasible for steel mills to spontaneously reduce production. It has become the norm for steel mills to fall into a prisoner's dilemma during the market downturn, and it is difficult for the market mechanism to play a normal role in the allocation of resources in the steel market. Xu Xiangchun said.

Some steel mills are bearing high costs while maintaining a high operating rate to recoup funds. "This is an abnormal market phenomenon that requires timely government intervention. Xu Xiangchun said.

"In addition, the pressure of local steady growth in 2023 is still there, and it will not take the initiative to reduce the output of local steel mills, but will fall into the misunderstanding that 'controlling output will affect industrial added value'," Xu Xiangchun said, "but output is not equal to industrial added value, and there is substantial growth only with profits." ”

Against this backdrop, iron ore prices in 2023 are at odds with steel.

Iron ore prices fluctuated higher throughout the year, and the main futures contract reached the highest of 998.5 yuan/ton in late November, a new high in two years.

Looking back on 2023, iron ore price fluctuations can be roughly divided into three stages.

According to the research report of SDIC Anxin Futures, the first stage is from the beginning of the year to mid-March, with the liberalization of the epidemic policy adjustment and the increase in macro policy efforts to improve the demand prospects, iron ore fluctuated higher in the case of the rapid increase in the output of molten iron in steel mills.

The second stage is from March to May, and the weakening of economic data falsifies the logic of the strong recovery in the previous period. In addition, the failure of domestic policy stimulus expectations and the emergence of overseas banking crises and other risk events, iron ore prices have rebounded sharply under the logic of negative feedback and hit a new low of the year, to 665.5 yuan/ton.

The third stage is the rebound from the end of May to the present. The specific reasons can be divided into the initial price overfall repair, the strong realistic demand support brought by the medium-term high-speed rail water, and the strong demand expectation driven by the macro positive stimulus such as trillions of treasury bonds in the later stage. In this round of rebound, the main iron ore futures contract hit a new high this year.

This year, the supply side of iron ore is relatively loose. According to the report of SDIC Anxin Futures, the cumulative global iron ore shipment volume from January to November reached 1.425 billion tons, an increase of 46.87 million tons over the same period last year, with a growth rate of 3.4%, and the total overseas supply is expected to increase by about 50 million tons in 2023 compared with last year.

As crude steel production continues to grow, China, the world's largest steel producer, is seeing its iron ore imports rise in tandem.

According to data from the National Bureau of Statistics, from January to November this year, China's iron ore imports reached 1.078 billion tons, an increase of 62.32 million tons year-on-year, with a growth rate of 6.2%. SDIC Anxin Futures expects the total import volume of iron ore in 2023 to increase by about 65 million tons year-on-year.

At the same time, domestic steel demand is in a downturn.

Real estate demand is still the main contradiction in the industry. "In 2023, the sharp adjustment of real estate will drag down steel demand, and at the same time affect the investment of local finance in infrastructure, and the growth of steel demand such as manufacturing cannot offset the impact of real estate. Xu Xiangchun pointed out that the total domestic steel demand will decline by about 1% in 2023, of which the steel used in real estate will drop by nearly 20%, and the steel used in infrastructure, automobiles, shipbuilding, and steel structures will increase.

According to data from the National Bureau of Statistics, from January to November, the national real estate development investment was 10.4 trillion yuan, down 9.4 percent year-on-year, of which residential investment was 790 million yuan, down 9 percent. The construction area of real estate development enterprises was 831345 million square meters, a year-on-year decrease of 7.2%.

Therefore, domestic steel began to turn more to foreign markets, and the pressure on export sales increased. Shanghai Ganglian expects to export 92 million tons of steel (billet) throughout the year, a year-on-year increase of 35%, and net exports will increase by about 32 million tons over last year.

"This is not because the international market demand is strong to drive steel exports, but the domestic supply pressure is high, and the market is difficult to digest. Xu Xiangchun said, "This kind of non-domestic demand to form a support for iron ore prices, is obviously harmful to steel mills, which is the key to the industry's reflection and consensus." ”

Under such pressure, "the strong are always strong" still exists. "Under the overall profitability of the current industry, only China Baowu, Valin Steel and other head companies are higher than the industry profitability level, and the rest are mostly due to losses dragging down industry profits. Xu Xiangchun said.

In 2023, the pace of mergers and acquisitions in the steel industry will continue to advance, and state-owned enterprises and large private enterprises will actively carry out enterprise restructuring, and the industrial concentration will be further improved.

This year, there have been a number of mergers and acquisitions in the steel industry. In June, HBIS (000709.SZ) increased its capital to Legang by 4.8 billion yuan in cash, and after the completion of the capital increase, HBIS held 69.1% of the shares; in October, Anshan Iron and Steel Group substantially merged and reorganized Lingyuan Iron and Steel Co., Ltd.; in November, Jianlong Group decided to restructure Xining Special Steel (600117.SH).

In December, the acquisition of Nanjing Iron and Steel Co., Ltd. (600282.SH) came to an end, CITIC settled in Nanjing Iron and Steel Co., Ltd., Baosteel Co., Ltd. (600019.SH) acquired Shandong Iron and Steel Rizhao, and Shagang Group acquired part of the equity of Fushun Special Steel Co., Ltd. (600399.SH).

Regarding the question of whether the downturn in the industry will bring about further reshuffle, Xu Xiangchun said, "It is difficult for the market to be forced out of the market, and there is often a situation where it is broken but not collapsed, and at the same time, there will be steel mills that will take over part of the production capacity, resulting in the failure to achieve substantial clearance." ”

For the iron ore and steel markets in 2024, he believes that the economic policy is gradually becoming clear, and the real estate is gradually stabilizing after several years of substantial hard landing, especially the official promotion of the transformation of urban villages in super megacities, and the decline in real estate is expected to narrow significantly in 2024.

"It is necessary to be vigilant that with the recovery and growth of domestic demand, if the output of steel mills is still not controlled in an orderly manner, the relationship between market supply and demand may still deteriorate. It is necessary for market regulation and macroeconomic regulation to play a role at the same time. Xu Xiangchun said.