Global seaborne iron ore market has entered a period of oversupply

The high cost of raw materials is one of the major reasons for the sharp decline in earnings of Chinese steel companies. The soaring iron ore prices over the past few years have indeed made Chinese steel companies miserable. Over the years, steel companies have been eagerly looking forward to reversing the relationship between supply and demand for iron ore at some point, and many have said that 2012 will be such a year. Now that 2012 has arrived, the price of iron ore has indeed fallen sharply from the highest period. Has the shift in supply and demand really come? The China Metallurgical News interviewed the famous steel analysts: World Steel Dynamics (World Steel Dynamics) Mr. Peter F. Marcus, managing partner.

“China Metallurgical News” reporter: In the past year, the changes in the iron ore market were impressive. How do you view the supply and demand fundamentals of China's iron ore in 2011?

Marcus: In 2011, China's pig iron production was about 630 million tons. In addition to converter steelmaking, some of the electric furnace smelting processes, cast pig iron, and ductile iron also consumed a portion of pig iron. Based on our years of experience in tracking China's production data, we estimate that almost 10 to 20 million tons of pig iron produced in China is not included in the statistics.

We estimate that in 2011, China's consumption of iron concentrates, lump ore and pellets all add up to approximately 1.04 billion tons, of which 437 million tons will come from domestic mines and 686 million tons will come from imports. At the same time, China's iron ore stocks rose by 66 million tons in 2011, of which about 35 million tons were in ports.

From the sources, in 2011, China's domestic iron ore concentrate supply increased by 54 million tons from the previous year, and the growth rate was almost 18%; while foreign supply increased by 67 million tons, an increase of almost 11%.

“China Metallurgical News” Reporter: From your analysis, it seems that a large number of stocks have been accumulated in circulation during the past year. In addition, the release of China’s iron ore production capacity seems to be a force?

Marcus: Yes, we can use another set of data to see this interesting phenomenon. In the fourth quarter of 2011, China's steel production dropped sharply to an annual output of 626 million tons, which is a drop of about 100 million tons per year from the second quarter of 2011. In the same period, China’s iron ore imports reached a record level equivalent to an annual import of 702 million tons. Of course, most of the imported mines were ordered before the end of October last year, when steel production was still high.

In September and October 2011, China's domestic iron ore concentrate production was equivalent to an annual output of 519 million tons, which was much higher than the 437 million tons of annual production that year. Of course, iron ore production in China is relatively small every winter, and this seasonal factor cannot be ignored.

In the fourth quarter of last year, China’s steel production was very severe, falling by almost 10% from the previous quarter. Surprisingly, in the fourth quarter of last year, China's iron ore concentrate output rose by about 1%. On a year-on-year basis, China's refined iron ore output remained at a level of 497 million tons per annum in the fourth quarter of 2011, which is also high compared to the 418 million tons/year level in the fourth quarter of 2010. This contrast means that a large number of iron ore stockpiles are accumulating.

“China Metallurgical News” Reporter: You mentioned in a report that the price of imported iron ore delivered by China may fall to around US$100/ton?

Marcus: Yes, the era of high iron ore prices has come to an end. The price of iron ore is higher than US$125/t—the picture we call “at shortfall” will dissipate. There are two main reasons why iron ore prices were sold at “shortage” levels: First, China’s high-growth demand is difficult to satisfy; second, iron ore buyers and traders psychologically believe that the price of iron ore is US$175/tonne. Stone prices are "normal." But now the situation has changed. I think the market price of iron ore may drop to about $100/tonne. Even if it enters the peak demand season, China's steel production will return to a level of about 700 million tons/year, and iron ore prices will not grow too much.

“China Metallurgical News” reporter: However, there are also many bad news about the supply of ores. For instance, the export of India to China is expected to continue to decrease. How much will this affect the market?

Marcus: In 2011, India shipped about 73 million tons of iron ore to China, compared with 140 million tons in Brazil and 300 million tons in Australia. Not long ago, India’s iron ore export tariffs increased to 30%, which may cause the price of Indian ore shipped to China to increase by about US$10/tonne. However, in our view, the current oversupply of iron ore is so huge that the reduction of India’s exports will not have much impact.

Chinese domestic mines may occupy this part of the market. According to China's relevant statistics, in 2011, China's iron ore investment reached 19 billion US dollars, and in 2010 it was 16 billion US dollars. In September and October of last year, China’s iron ore production reached an annual output of 519 million tons. We believe that under current iron ore prices, China’s iron ore concentrate output may return to similar levels in March and April.

“China Metallurgical News” Reporter: Some people may not agree with this view, because China's domestic mines are too expensive. At lower prices, some of the production capacity may lose competitiveness and exit the market.

Marcus: There is such a view. There are views claiming that 120 million tons of China's iron ore concentrate production costs exceed 120 US dollars / ton. However, we do not agree. According to our estimates, China's domestic iron ore concentrate production capacity at the end of 2011 was approximately 550 million tons/year. Among them, the production capacity of mines estimated to cost more than US$120/ton is only 40 million tons, accounting for 7% of the total. According to our classification, the high-cost capacity with a cost of more than US$110/ton is almost 70 million tons/year, and an estimated 40 million tons of refined iron ore production capacity is produced with an average operating cost of US$100~110/ton.

“China Metallurgical News” Reporter: In general, you are very sure that in 2012 the global seaborne iron ore market is in a state of oversupply?

Marcus: Yes, we have seen excesses. With regard to the supply and demand relationship in the Chinese market, our forecast is this: If China's crude steel production reaches 702 million tons in 2012, it is estimated that domestic iron ore concentrate production may increase by 23 million tons to 460 million tons, and at the same time, China will import ore for delivery. The volume reached about 663 million tons, a drop of 8% from the previous quarter. In this supply-demand balance, we also assume that China's iron ore inventory will increase by 5 million tons further--Note that this is unlikely to happen.

Even so, due to China's huge investment in building new mines, expanding old mines, and building ore processing lines in recent years, our forecasted Chinese production level (2012 production of 460 million tons) may still be too low for total capacity. At the same time, we also noticed that China's iron ore inventories have recently exceeded 100 million tons.

"China Metallurgical News" Reporter: Do you have an overall forecast for the global steel market?

Marcus: For the hot-rolled strip market, we have a forecast based on likelihood. The probability of a rough boom is 5%, hot rolled strip prices rise to about $800/tonne (FOB); the probability of a good period is 20%, and global steel demand rises about 4% — if the world The economic growth exceeded expectations, the average hot rolled strip price was approximately US$675/tonne; the possibility in the general period was 25%, the global steel demand only rose slightly, the international iron ore and coking coal prices dropped significantly, and the hot rolled strip averaged The price is about 600 US dollars / ton; the probability of the poor period is 40%, the global steel demand fell by about 2%, reflecting the decline in non-Chinese fixed asset investment and China's fixed asset investment slowdown; the probability of turmoil is 10% Apparent global demand for steel fell by about 4% to 5%, and hot-rolled strip prices fell to US$475/ton to 525 US$/ton in the short term.

We can see that we think the "bad period" is the most likely scenario.

“China Metallurgical News” reporter: In general, what do you think are the main challenges facing the steel industry?

Marcus: Of course, the challenges are different in different aspects of the industry chain. For mills, the challenge may be that there is not enough sales to maintain an economically advantageous operating rate (capacity utilization), and that companies will have to fight for market share.

For iron ore suppliers, they will face a sharp decline in iron ore prices. In this case, they will make a choice: either to cut production to restore prices, or to realize that although the price declines, but the profit is still sufficient, so continue to maintain production, while expecting to eliminate marginal competitors in the process.

Buyers of steel will be increasingly challenged to seek the best time to negotiate "special contracts." If they are too early, they may face a loss of inventory impairment; if they are too late, they may miss the opportunity to purchase at cheaper prices.