Iron ore prices high squeeze steel industry profits

Since 2012, the steel index has risen by 10.75%, slightly outperforming the Shanghai Composite Index's 10.04% increase, but it has been less than the cumulative increase of the Shenzhen Composite Index's 14.04%. According to the analysis, the rebound in the steel and building materials industry sector in the previous period was not based on the revision of the valuation, but was based on the expectation that the downstream demand might have improved, but the high price of imported iron ore greatly squeezed the profits of the industry and the main business of the steel company Worrying income. In the short term, no matter whether it is a rebound period or a high level, it should not be overly optimistic. The uptrend of the market outlook may still be a tortuous one.

As the market generally expects that the cost of imported iron ore will continue to fall in the next two years, the main profit of iron and steel enterprises is expected to increase. Therefore, the future long-term trend of the steel plate depends on whether the above expectations can be fulfilled or there are more than expected factors.

2011: High Costs, Low Profits in the Whole Industry

The steel industry is one of China's pillar industries. With the acceleration of China's industrialization and urbanization, domestic steel consumption has grown rapidly. In 2011, China's crude steel production reached 683.27 million tons, and for the first time it entered the 500 kilograms per person steel country.

However, the rapid growth of steel production and steel consumption levels brought about an increase in the dependence of iron ore on foreign countries and a significant increase in the quantity of imported iron ore. What followed was the impact of “China demand” on the global iron ore market: the 2010 annual long-term agreement price mechanism in the international iron ore market was dismantled, and Rio Tinto, BHP Billiton, and Vale are the world’s three largest iron ore mines. The supply company announced that it will change the annual long-term agreement to quarterly pricing, and in 2011 it will again change its quarterly pricing to monthly pricing, and will be priced based on the Platts iron ore price index.

In the face of global supply monopoly in the iron ore market, China's steel industry has paid a high cost. In 2010, the profit of the main industry of the Chinese steel industry was only US$90 billion for the whole year, and the sales margin was only 2.9%. Since the three major international mining giants changed their quarterly pricing, iron ore prices rose from less than US$90/tonne in January to US$146/tonne in December, a year-on-year increase of 62%.

From January to November 2011, 77 large and medium-sized iron and steel enterprises in China achieved a total profit of 85.297 billion yuan, and the profit rate was only 2.55%. Due to the impact of iron ore prices, the entire industry suffered losses in December 2012, making the industry's sales profit margin in 2011. Final fixed at 2.42%.

In 2011, China imported 666 million tons of iron ore, a year-on-year increase of 688 million tons, and the average CIF price of imported iron ore was US$163.84 per ton, a year-on-year increase of 28.13%. China’s iron and steel industry has increased its iron ore prices due to imports. More spending ** about 25 billion US dollars, which is about 1.9 times the total sales profit of the steel industry.

From the performance of the company, the profit space is not optimistic. Angang Steel Co., Ltd. announced that it expects the company’s 2011 net profit loss to be approximately 2.151 billion yuan. Baosteel Co., Ltd. and Maanshan Iron & Steel Co., Ltd. respectively announced that their 2011 net profit fell by 43.35% and over 50% year-on-year.