Iron ore slumps steel companies usher in profit window

Recently, the prices of steel and iron ore that have rebounded to high levels have brought about a rare situation of stable steel prices and a sharp drop in ore prices. This has given Chinese steel companies a rare profit window.

The characteristics of the steel industry chain are that the supply of upstream iron ore is highly concentrated, while the downstream steel production capacity is dispersed. As a result, the ore prices in the iron and steel industry are difficult to rise and fall, and the steel price tends to fall and rise. Since the beginning of this year, steel prices have experienced a sharp rise and fall, and people have once again seen this logic: in view of price, the current round of iron ore has risen by 57%, while rebar prices have risen by 29%. For this reason, all steel companies reported that in January-February 2016, steel companies' profits were better than the fourth quarter of 2015, but worse than the same period of last year.

But recently, iron ore dropped sharply. From the price point of view, yesterday, the major iron ore main contract of the company closed at 379 yuan/ton during the day, a decrease of 3.44%. Since March 22, the iron ore main contract has dropped by a high of 19%. In contrast, thread and hot-rolled coils have maintained a high level of consolidation around 2,200 yuan and 2,400 yuan since the 21st. Data show that as of March 25, the relevant index rose 132 yuan/ton from the end of February, far below the increase of 340 yuan/ton for the same period.

Senior analyst Qiu Yuecheng estimates that most of the domestic iron and steel enterprises' earnings per ton steel have reached more than RMB 200/ton, and the profit level is at the highest level in the past two years.

The rebound in steel prices was mainly due to the start of demand in the peak season. With the temperature rising in March, the construction site started one after another, and the terminal demand was released. It is reported that the country’s steel inventories have maintained a deceleration of approximately 400,000 tons from the previous quarter for three consecutive weeks, indicating that terminal demand has performed well during the traditional peak season. On the other hand, due to financial difficulties, the steel mills resumed production slower than expected. Statistics show that in January-February, China’s crude steel production dropped by 5.7% year-on-year, and the decline rate was 3.4 percentage points higher than last year; average daily crude steel production decreased by 2.83% compared with last December.

The low output of steel products has brought pressure on the demand for iron ore. According to statistics from the National Bureau of Statistics, at present, the national crude steel capacity utilization rate is less than 65%.

How long can current profitability of steel products last? Qiu Yuecheng believes that the key to look at the situation of the steel mills' production. In the case of high profits, the steel mills have enough power to resume production, and the pace of restarting will accelerate, and the steel price will be under pressure. At the same time, under high profit conditions, the pressure for reform of the iron and steel enterprises will decrease, which will be detrimental to the reform of the supply side.

On the 28th, China Steel Association announced the output of crude steel in mid-March. The data show that the steel production of Japanese steel production grew by more than 4% month-on-month.

Ren Zhuqian, the person in charge of the “My Steel” steel plate, also said that from the latest monitoring data, there is no obvious rebound in the operating rate of blast furnaces, and the pace of resumption of production by short-term steel mills is not fast. However, under the current profitability level, some previously suspended steel mills are still actively organizing the resumption of production. It is expected that the output will reach the limit in mid-April, which will exert pressure on the market trend and the profitability of the steel mills will also be adjusted accordingly.