Analysis: The impact of China's steel production costs in 2012

In the case of worsening debt crisis in Europe, commodity prices have generally declined recently, but steel prices have shown signs of stabilizing and rebounding. At the same time, the shutdown of some domestic steel mills has gradually restored market confidence. However, the author believes that while the benefits of suspension of production will come at the same time, the direct reduction in the demand for raw materials will also drive down the cost of steel products. Coupled with the traditional off-season, August steel prices will fall and rise.

Due to the severe overcapacity in the steel market, in the medium and long term, the price of steel is determined by its marginal production cost, which is determined by the price of ore, coke and scrap. The most important variable is the ore price. The current ore market is also an excess market, and the price of ore is determined by its marginal cost. The marginal cost of global ore is determined by China's domestic mines, and the production cost of mines that account for more than 30% of domestic mine production is between 600 yuan/ton and 700 yuan/ton, and the conversion to dry base tax is around 800 yuan/ton to 900 yuan. Near / ton, in the medium to long term, it forms a support for steel prices.

China is the world's largest producer of pig iron. Changes in China's iron ore market can effectively explain the supply and demand situation of the global iron ore market. Since 2003, the price of iron ore has been rising, especially since prices have jumped upwards after 2007, and high profits have attracted more and more people into the ore industry. Although the iron ore industry has a long production cycle, the construction period of large-scale foreign mines generally takes 5 to 7 years. China's small mines generally take 1 to 2 years, but since the rapid rise in ore prices in 2007, it has been 2012. The year has also been more than five years. Many new mines have been put into use, and more mines will be put into use in 2012-2014. It seems that the mine market will become more and more relaxed.

Since the second half of last year, the growth rate of consumption in the iron ore market has dropped and the supply growth rate has increased, turning into a surplus market. In the first half of this year, the global growth rate of pig iron production was 2.49 percent year-on-year, representing a year-on-year growth of 6.2 percent, a decrease of nearly 3.7 percent. At the same time, global iron ore production is rising. In the first half of this year, the output of China's iron ore raw ore increased by 5.9% year-on-year, and the annual production in 2011 increased by 23.5%. In the same period, the output of the three major mines in the first two quarters of this year was basically the same as that of the same period of last year, but the overall capacity of the three major mines increased by 11.7% over 2011. External mining output outside the three major mines also increased. The ore market experienced a surplus, port stocks soared, and prices fell rapidly.

From the micro data point of view, inventory and consumption ratio is a very sensitive supply and demand indicators. The consumption of inventories has increased from around 4 weeks in 2007 to around 9 weeks in October 2008, and this indicator has been falling all the way to the 6 weeks of April 2010 along with the rapid economic recovery. The slide again hit a high of 9 weeks in November 2011. At present, this index is maintained around 7 weeks due to ore deposits. From a historical point of view, inventory consumption is a medium-high value compared with about 7 weeks, and the corresponding ore market is relatively loose.

The marginal cost of domestic mines determines the price of iron ore. From the global iron ore market, there are three levels of ore cost from low to high: the first level is the original world-class mines, represented by the three major mining giants, not only enjoying extremely low mining cost, but also improving The basic supporting facilities have always kept it at the bottom of the cost line; the second level is the overseas emerging mines, which have advantages in the cost of mining, but a series of external cost amortization such as logistics and environmental protection has pushed up the overall cost. Located in the mid-range area of ​​global mining costs; the third level is high-sensitivity domestic mines, due to the poor mining conditions, low raw ore grade, and high cost of beneficiation, making this part of the mine at the top of the cost curve, its ore price Extremely sensitive, the marginal cost of this part of the mine determines the price of iron ore.

The marginal cost of mines in the Tangshan region of China is around RMB 600/ton to RMB 700/ton, which is mostly owned by private enterprises. It is sensitive to price. At present, the small mines of many private enterprises in China have ceased production, which will play a certain role in supporting prices. From the historical price trend of refined powder (as shown in the figure), it can be seen that the price of domestic ore will not be maintained in the vicinity of 600-700 yuan for a long time, and the production loss will reduce the production of large numbers of mines. The maximum price of ore is between 100 yuan and 200 yuan.

In the medium to long term, the supply of the ore market will increase from 2012 to 2014, and the global ore market will be in excess and prices will decline. However, due to the high marginal cost of China's domestic ore, and the self-sufficiency rate of China's iron ore market accounts for about 40%, which effectively limits the decline in ore prices. Therefore, for a longer period of time, ore prices will slowly decline as supply increases, which will also be a strong support for the downward trend in steel prices.