The relationship between supply and demand determines the price of iron ore

In October, Rio Tinto signed the first RMB business of spot trade with Rizhao Port Group, and signed a sales agreement with representatives of Shanxi Gaoyi Steel Co., Ltd. According to the agreement, Rio Tinto will supply 10000 tons of SP10 medium grade iron ore (59% iron content) to Gaoyi steel. This is Rio Tinto's first Renminbi denominated supply contract with Chinese steel companies. Vale has started to use RMB for settlement in 2017, so far, two of the world's three largest iron ore suppliers have started to use RMB for settlement. BHP Billiton also recently expressed support for benign competition and mixed pricing of various iron ore price indexes. From the perspective of the three major mines and the industry situation, the bargaining power of iron ore has begun to incline to China. The lack of pricing power and the incline of industrial chain profit to the upstream The stone seller's market is unbreakable. At present, more than half of the iron ore imported by Chinese steel mills is Changxie mine. Changxie mine started to use index pricing since 2010. The price is based on the Platts index. Platts determines the price customization of most suppliers with a small sample. The pricing mechanism is irrational. Due to the lack of pricing power in iron and steel enterprises, iron ore prices do not reflect their own supply-demand relationship, but follow the change of steel prices.

Iron and steel industry often increases revenue without increasing profits, which has always been at the bottom of the industrial chain profit distribution. As a big iron ore consumer, China's import of iron ore has moved all the way since 2010, but this trend has reversed in 2018. According to the data of the General Administration of customs, in 2018, China imported 1064 million tons of iron ore, a year-on-year decrease of 1.0%; in 2019, the import of iron ore continued to decline, from January to October, the import of iron ore was 877 million tons, a year-on-year decrease of 1.6%. The industrialization and urbanization of China are entering the middle and later period. The mode of economic development and the driving force of growth are both changing. The intensity of steel consumption per unit GDP is obviously decreasing. The total steel consumption has entered the peak arc top stage, and it tends to decline in the medium and long term. The decline of steel consumption will inevitably lead to the decline of raw material demand. At the same time, as an alternative resource of iron ore, the total amount of scrap resources is increasing gradually. According to the data released by China waste steel Application Association, the total output of waste steel resources in 2018 was about 220 million tons, with a year-on-year increase of 20 million tons.

Among them, 40 million tons of scrap are produced by steel enterprises, accounting for 18% of the total resources; 180 million tons of scrap are purchased from society, accounting for 82% of the total resources. It is estimated that in 2019, China's total scrap will be 250 million tons, an increase of more than 30 million tons on a year-on-year basis, of which the amount of scrap purchased by the society will be about 200 million tons. By 2030, the social steel reserves will reach 13-13.5 billion tons, and the annual production of social scrap resources will reach 320-350 million tons. On the one hand, the total demand for steel in the future is likely to slow down, and the demand for raw materials for production will slow down. On the other hand, the supply of scrap steel will increase year by year, and iron ore will be replaced. The demand for iron ore in the steel industry will decrease, and the global iron ore market is gradually transiting to the buyer's market. It is an inevitable trend to meet the needs of Chinese iron and steel enterprises with RMB pricing mode. In the global market, China is the largest buyer of iron ore. in the process of domestic demand rising, the price of iron ore rises. If the demand falls, the influence on global iron ore demand and price will be greater. Although the iron ore import has entered a declining cycle, China is still the largest iron ore import country in the world. In 2018, arrivals from Australia and Brazil accounted for 79.1% and 55.2% of China's iron ore shipments, respectively. Both countries are export-oriented economies. If the export volume of iron ore is significantly reduced, it may affect the already weak economic growth.

From 2017, Vale, the largest mining enterprise in Brazil, started to settle with China's steel enterprises in RMB. This year, Vale has visited Chinese cooperative enterprises for many times. Although the RMB denominated contract signed by Rio Tinto and Chinese enterprises is small in volume and has little impact on the trade model, it may be the future development trend. In the near future, he Wenbo, Secretary of the Party committee of China Iron and Steel Industry Association, called for the establishment of a benign cooperative relationship recognized by both the supplier and demander of iron ore that can meet the common interests of the upstream and downstream. In response, several major international miners responded positively. BHP Billiton said it supports benign competition and mixed pricing of various iron ore price indexes; FMG also said it supports a pricing mechanism that accurately reflects the supply and demand of iron ore and can provide certainty for the industry. In the international market and bulk commodity field, futures price has become an important reference for international trade pricing. China's iron ore futures contract was listed in Dalian Commodity Exchange in October 2013, but the impact of iron ore futures is limited in China because international mines and investors cannot participate in the transaction.

In May 2018, China's iron ore futures officially introduced overseas traders to realize internationalization. By the end of October this year, more than 170 overseas customers had opened accounts in 15 countries and regions, including Singapore, Hong Kong, Australia and the United Kingdom. Among them, more than 110 overseas customers participated in the transaction, their trading positions increased steadily, and the market structure continued to optimize. Since the listing of iron ore futures, the annual trading volume is about 200-300 million. From January to October this year, the daily average turnover and daily average position were 1277600 and 962400 respectively. In terms of the function of iron ore futures, as the market scale becomes larger, the price formation mechanism is more reasonable, which can better reflect the supply and demand and price level of the global spot market, and the domestic and foreign price correlation of iron ore is constantly improving, which is conducive to the spot market pricing and settlement with reference to the futures price. The supply-demand relationship is the most basic factor to determine the price. The imbalance pattern of iron ore pricing power will not last for a long time. At present, the industry environment is changing, the disordered competition among enterprises is gradually improving, the supply of scrap steel resources is increasing, and the international influence of iron ore futures is increasing. Under the influence of many factors, the International Chamber of Mines realizes that the final pricing power of iron ore should balance the interests of users, and the bargaining power of iron ore will incline to China. However, China's iron and steel enterprises are still relatively scattered. Facing the high concentration of international iron ore suppliers, the bargaining power is still weak, and the final balance of iron ore bargaining power remains to be seen.