浙江之源资产评估有限责任公司
Analysis of the Operational Characteristics of China’s Iron Ore Market
Release time:
2014-06-12
Source:
China Mining Network
Iron ore is one of the primary raw materials used in ironmaking, accounting for 60% of the cost of pig iron. The rapid development of the steel industry in Asia has already transformed the pricing rules for China’s iron ore imports; the annual pricing model is now being replaced by shorter-term index-based pricing models. The steel industry has come to recognize the importance of risk management in response to frequently fluctuating prices. On the black metals product chain, the CME Group offers futures contracts settled based on both the TSI and Platts indices, as well as options on these same indices. Additionally, the CME Group collaborates with Mysteel to offer rebar futures, and provides a comprehensive range of products covering the entire black metals value chain, including U.S. hot-rolled coil, European hot-rolled coil, Black Sea billets, Turkish scrap steel, U.S. scrap steel, and Australian coking coal.
In June 2008, Platts Energy Information launched the world’s first daily price assessment service for seaborne iron ore, targeting the global market. At the close of each business day (for most Asian spot markets, at 6:30 p.m. China time), Platts analysts evaluate the information collected prior to that time to arrive at the day’s benchmark price. At the heart of the Platts Index is the principle of identifying a tradable market price. Every day, the Platts Index seeks out the highest bid from buyers and the lowest ask from sellers in order to determine the day’s index price. The Platts Index is derived from spot prices in the Chinese market and was initially based on the trading price of iron ore with a 62% grade. As the pricing benchmark for quarterly and spot trade settlements among the world’s three major mining companies, the Platts Iron Ore Price Index has become the de facto official index for determining iron ore prices—especially since April 2010, when nearly all Australian and Brazilian iron ore shipments have been referenced against this index.
Over the past decade, global iron ore consumption has grown by 88.0%, with an average annual growth rate of 5.9%. Among this, China’s iron ore consumption has increased by roughly 4.2 times, achieving an average annual growth rate of 13.8%. China’s demand has become the primary driving force behind this growth. In 2012, 37.3% of China’s iron ore consumption was met by domestic supply, while the remaining 62.7% relied on imports. The global iron ore trade has thus taken shape as a pattern in which countries such as Australia, Brazil, and India supply iron ore to regions including China, Japan, and the European Union. Looking at trends over the years, China’s demand for iron ore has steadily risen. From a regional perspective, iron ore demand is concentrated in the Bohai Rim region. Moreover, more than 50% of imported iron ore is cleared through customs in the Bohai Rim region. China’s output of finished steel accounts for nearly half of the world’s total, which means that steel mills not only face supply constraints but also contend with uncertainties in transportation—both of which can lead to volatile price fluctuations.
The main factors influencing iron ore prices in China include: macroeconomic performance, which serves as a barometer of iron ore market demand and significantly affects price fluctuations; robust demand for steel from related industries such as construction and automotive manufacturing, which in turn boosts demand for iron ore and helps sustain its prices at high levels; iron ore costs, which are influenced by a range of factors—including the prices of mining equipment, labor costs, water and electricity expenses required for mining, relevant taxes and fees, and maritime transportation costs—all of which impact the delivered cost of iron ore; import and export policies of producing countries, tariff policies of importing countries, and steel industry development policies of consuming countries—all of which can affect iron ore prices; growth or decline in iron ore production capacity and output also have an impact on market prices; international iron ore prices are strongly linked to domestic prices, meaning that changes in global market prices are transmitted to the domestic market, thereby influencing iron ore prices; shifts in downstream demand likewise cause fluctuations in iron ore market prices; when iron ore prices are relatively high while prices of substitute products, such as scrap steel, are comparatively low, this can lead to a downward trend in iron ore prices; changes in inventory levels also affect iron ore market prices—for instance, if regional inventories rise, traders become more willing to sell, driving prices down; conversely, if regional inventories fall short, traders tend to hoard supplies, pushing prices up.
Over the past 40 years, iron ore prices have been set through an annual negotiation process between miners and steelmakers, resulting in a “benchmark price”—a fixed price applicable throughout the year. The emergence of China as a key pricing hub for the entire industry has disrupted this established process, giving rise to an open market-pricing mechanism that relies on short-term contracts based on spot reference points. These spot transactions are calculated and aggregated into price indices, which then serve as the settlement reference for iron ore financial trading. Under this index-based pricing model, with its floating prices, Chinese steel companies have come to recognize the importance of using iron ore financial derivatives to manage price risks, and their demand for hedging against these risks via CME Group’s iron ore financial derivatives is growing steadily.
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