FEATURE: China’s iron ore amid greener steel - tomorrow
Chinese market sources are confident that the world’s top iron ore miners, without any doubt, will be more attentive to China’s change of appetite for iron ore – certainly regarding the ferrous content and impurities, and even pricing schemes – with Beijing’s ever-growing emphasis on environmental protection for the country’s steel industry. They will also be mindful of the persisting oversupply in the global iron ore market since 2015 when China’s steel production hit its peak and acknowledge that Chinese crude steel production will probably hover around 800 million tonnes over the next three-five years.
Amid the changes, the immediate obvious impact will be the strengthening in the pricing power in raw materials of the Chinese steel mills, as the global iron ore market is turning into a buyers’ market from a seller’s – even though some Chinese consumers are just coming to terms with how influential they can be in pricing negotiations.
“For the top iron ore miners, other than China there is no second giant market to absorb the over 1 billion tonnes of iron ore annually – certainly not in the near term – so the situation is either win-win or lose-lose, and I feel that all the key suppliers have long realized this,” a Chinese iron ore trader commented.
This could mean that a greater variety of ore pricing mechanisms will evolve, with the Chinese steel mills and traders continuing to explore the best pricing settlement schemes with their core suppliers to meet their individual needs, other than quarterly or monthly pricing. Indeed, the Chinese buyers have already been testing index-pricing, and brand pricing, while taking on iron ore derivatives for hedging.
As for iron ore miners, they have been increasing the portion of spot business in total sales – denominated either in US dollar or in Chinese Yuan – to serve a larger group of Chinese steel mills of differing sizes and raw materials’ needs. Vale disclosed earlier this year it planned to increase the blending volume of its iron ore for China to 100 million tonnes for 2018 from last year’s 66 million tonnes and is selling the quantity in the duo currencies in China.
Secondly, the iron ore market will be more financialized in the years to come, with the China Securities Regulatory Commission’s gradual relaxation of rules regarding the trading of ferrous commodity derivatives. The commission gave its nod to the launch of futures trading in steel products in 2009 and gave its approval for the introduction of iron ore futures in 2013. Oil futures were only approved on March 26 this year while the international trading of the Dalian Commodity Exchange’s iron ore contract was allowed from May 4 2018.
DCE disclosed on September 21 at the CISA event that it has been working on iron ore options too, which coincided with Shanghai Futures Exchange’s formal launch of its copper options the same day.
All these will help upgrade China’s ferrous industry, according to Rod Dukino, general manager iron ore sales of BHP. “With its (China’s) stricter emission requirements, it will be able to comply with international emission standards by 2020…The country’s steel industry is getting bigger, coastal, and cleaner,” Dukino told his audience in Dalian, sharing his clear vision for China’s steel industry in the next five years.
Thirdly, within the next few years the global iron ore miners will be meeting fewer Chinese steel mills for pricing negotiations as China is embarking on another push for steel industry consolidation. Indeed, the first major merger may already be in train, with reports suggesting China Baowu Steel Group, China’s top mill and the world’s second largest steelmaker after ArcelorMittal, is in talks with Ma’anshan Iron & Steel in central China’s Anhui province about joining forces.
If the discussions prove successful, the integration of Ma’anshan would add another 20 million t/y steel capacity to the Baosteel-Wisco family, as well as contribute to Beijing’s goal of having China’s top 10 mills account for 60% the country’s steel output by 2020.
By 2020, it could well be that the world’s top four or five iron ore miners will be selling iron ore to perhaps 10-20 steel giant producers in China. How the iron ore market behaves under the force of this new dynamic will be interesting to observe.
Written by Hongmei Li, li.hongmei@mysteel.com
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