[Practical logic behind the price of minerals] Is irrational prosperity or rationality rising?

Source: Changjiang Iron and Steel

1 Introduction: Irrational prosperity, or rationality rise?

From short supply to oversupply, iron ore fell in the altar, and the price was lowered to around $40 at the end of 2015. However, since 2016, the ore has been alive and well, and once again rose back above $90. However, the market's doubts are also generated, the ore supply is too much to change the fundamentals, the superposition of production capacity is unfavorable to the raw material end, why the ore can also frequently produce a phased rise in the market, is there a universal principle behind its pricing?

2

2.1 Supply is getting too much, the price of minerals is on the way down

Since 2002, with the gradual acceleration of China's urbanization and industrialization process, the steel industry has entered a period of rapid development, and the demand for ore has gradually increased. Among them, the long-term agreement price mechanism has continued until around 2010, and the phenomenon that the spot price is higher than the long-term price during the long period of time undoubtedly indicates that the ore has maintained a supply shortage or a balance between supply and demand before 2010. However, the prosperous market has also led to the release of ore capacity, and the end result is that the ore capacity expansion has significantly exceeded the growth of crude steel production. In 2010, the global ore export volume was about 1.109 billion tons, and the crude steel output was 1.433 billion tons. In 2015, the global ore export volume was about 1.494 billion tons, and the crude steel output was 1.620 billion tons. During this period, the ore export volume increased by about 34.71%, and the crude steel output only rose. 13.04%.

The overall pattern has gradually turned into oversupply, and the low-cost Australian mines and Brazilian mines in the expansion have replaced high-cost domestic mines and high-cost mines in other regions, while the latter can only leave the scene. That is, from 2011, the price of minerals has gone up to a high level.

2.2 Mine price = cost + profit, the source is not the same

We are trying to break the frame of long-term agreement price and index pricing, and rise to a more general angle to fully explain the composition and origin of the price of minerals.

Look at the two phenomena first. First, over the years, the supply and demand gap of ore is more related to the trend of the price of minerals. This is not surprising. The price of commodities is obviously dominated by supply and demand. However, the phenomenon shows that the final price is often consistent with the marginal supply cost. Second, steel. The correlation between industry profit and mineral price trend is also high. There is a certain distribution and adjustment mechanism for profits in the upstream and downstream of the industry chain. Therefore, the mine price will change according to the profit of the smelting process.

Based on the above phenomenon, we dismantled the price structure into two parts, which are called the cost part and the profit part respectively.

1 The cost is partly due to supply and demand and is closely related to the marginal supply cost. In the resource field represented by ore, the basic pricing reference value depends on the global resource cost curve (from low to high) to meet the marginal supply of the last part of the demand. The cost is the bottom line of resource pricing. The reason is that the ore enterprises will at least carry out the normal operating price above the cash cost, otherwise they will withdraw from the market and will not participate in the effective cost curve.

Therefore, from low to high, the supply cost of the ore of the final (end) demand is determined, and the cost part of the ore price is determined.

2 The profit part, that is, the premium of the mineral price in excess of the cost part, is derived from the profitability of the iron and steel smelting process. In short, as long as the profit of the steel enterprise is more, the expectation of the price increase is more sufficient. After all, the profit of the industrial chain passes the supply and demand and the price. Change conduction, there is a redistribution mechanism.

2.3 Low-cost mine production is lowering the “cost component”, and steel companies’ profit decline limits “profit portion”

Since we know the principle of the price of minerals, we can make a more accurate explanation for the decline in the price of minerals starting in 2011.

The ore producers were very profitable before 2011. They have a higher growth rate of crude steel output since 2009. They are basically optimistic about the demand for ore. At the same time, based on the competition for market share, all ore producers have adopted the expansion strategy. . The final result is that the new low-cost Australian mines and Brazilian mines are increasing, and the low value range of the cost curve is prolonged. The growth rate of crude steel production is difficult to see after 2013, and the ore demand cannot follow the ore. The marginal supply costs for the supply of expansion to meet the needs of the last batch of ore are declining, and high-cost domestic mines and high-cost mines in other regions are gradually replaced and exit the market. As a result, low-cost mines expand too quickly, lowering the marginal supply costs, and thus lowering the cost of the mine price.

Not only is the cost partially suppressed, but the profit margin of the mine price is also affected by the long-term unilateral decline in steel prices. During the period, the profitability of steel enterprises continued to decrease, and under the framework of the industry chain profit shrinkage game, the mineral price could no longer claim more premium space, that is, the profit of the mine price was significantly compressed.

3 A new story under the capacity: the differentiation of the cost curve, the demand for industrial profits

3.1 History since 2016: the same price increase, different market conditions

After the opening of the reform in 2016, there are basically two types of rising prices in the ore: one is the structure-driven market, and the structural shortage of high-grade ore that is driven by the “dead-double-focus” in the fall of 2016 is typical, and the first is profit-driven. Quotes, the expected profit of steel mills in January-February 2017 is high to the upstream iron ore.

September-November 2016: tar ratio minus the cost of steel, caused by a structural shortage of high-grade ore

In the autumn of 2016, the structural driving market can be divided into three stages: the first stage is from the end of September to the end of October. Due to the soaring coke, the steel mills purchase PB powder in order to save costs; the second stage is from early November to November. In the middle and late tense, the premium of PB powder compared with other varieties has been quite remarkable. On the one hand, the amount of Hong Kong has increased. On the other hand, some traders are reluctant to sell, and even the sun shines, the market is turning to pursue Mike. , Jinbuba and other medium-sized powder mines; the third stage is from late November to the end of December, the coke is adjusted in stages, the finished materials are up, and the profitability of the steel mills has improved. Qingdao Port Hong Kong stocks 06,910 PB powder arrives in large quantities, the port The inventory began to accumulate, and the overall port inventory of the mainstream of the six ports in Hong Kong basically recovered to the level of early October, and the shortage of medium and high products was further alleviated.

January -February 2017: Optimization of steel supply and demand led to high profit expectations

In the January-February 2017, the demand for steel continued to prosper, and the growth rate of real estate investment and manufacturing-related output were relatively high. On the one hand, the steel supply side continued to increase the number of administrative capacity, especially the elimination of the intermediate frequency furnace incident, causing marginal contraction of the industry supply. On the other hand, frequent and severe environmental protection and production restriction measures significantly suppressed the supply and release capacity of the industry. Under the trend of supply and demand optimization, steel companies have high profit expectations. Naturally, in the context of high earnings, the industry is partially tolerant of profits in the price of minerals, driving the price of minerals.

3.2 The composition of the two prices of minerals, rising two rounds of market

3.2.1 Structure Drive: The high cost curve replaces the overall cost curve, and the cost is partially shifted up.

Whether it is structure-driven or profit-driven, it is actually a different part of the price of the mineral price or the profit.

In the structure-driven market, due to the increase in coke prices, steel mills will increase demand for high-grade ore in order to increase production efficiency while reducing coke ratio to reduce costs. At this point, the steel mill will tend to select the supply cost curve of the medium and high grade ore. The marginal cost of this curve is higher than the marginal cost of the overall curve. Finally, the supply cost in the same demand situation is collectively moved up, which is part of raising the cost of the ore price. A special kind of path.

3.2.2 Profit-driven: steel companies' earnings expectations rise, profits increase

In the profit-driven market, steel profit or profit expectations rose, steel mills also increased the profit margin of the mine price, the premium space increased, the profit partially moved up, and the iron ore price rose.

4 Now, how will the new story continue?

4.1 The general trend: the long-term downward trend has not been reversed

4.1.1 The oversupply pattern is normalized, and the cost is partly lower.

From the perspective of supply and demand balance of iron ore, 2010 has been in a state of oversupply for a long time, that is, although the demand for iron ore has increased every year, it is not as fast as the supply. In 2017, the mine maintained its expansion trend. The newly added iron ore production capacity of mainstream mines was about 0.8 billion tons. It is estimated that the total iron ore supply will increase by 106 million tons.

The low-cost mines in foreign countries have increased their production, and the oversupply has further deteriorated. The direct result is that the low-cost range of the global supply cost curve is widening. When the demand for ore is relatively stable, the marginal supply cost of ore will gradually decrease. The cost part has the risk of falling at any time.

Moreover, the premise that the demand for ore is relatively stable is not necessarily stable in the context of the de-capacity of the steel industry.

With the further development of the industry, the amount of scrap produced each year is on the rise, and its price may fall due to the gradual release of supply. Then, the steel mill may increase the ratio of converter scrap to reduce the cost, thereby reducing the iron ore demand in some long-process steelmaking processes; on the other hand, the cost of electric arc furnace steelmaking will decrease, and the proportion of short-process steelmaking with certain cost advantages will be reduced. It will be upgraded to squeeze the long-process steelmaking ratio and correspondingly reduce the ore demand for the main raw materials of the long process. In the long run, this will exacerbate the oversupply pattern of iron ore.

Therefore, there is not only a supply-side risk from the increase in production of low-cost mines, but also a risk of structural structural shrinkage at the demand side. Therefore, it is difficult for the cost of the mine price to have a trend growth window .

4.1.2 Structure or profit-driven, the fuse needs time to brew

The fuses for the generation of structure-driven or profit-driven markets are not always available, such as structure-driven high-grade mine logic, or profit-driven demand expectations are expected to change to a certain degree in the industry chain. .

The logic of high-grade ore is inherently short-lived. As in the autumn of last year, as long as there is demand and profit, no matter what kind of mine, the supply will increase. After all, the long-term surplus pattern of ore cannot be changed; and the economy is in the current situation, the industry chain is booming. Expect to continue to strengthen the window, or need more time or events to brew.

4.2 Steel profitability and resilience are sufficient, the profit part or the ore-forming price is mainly supported

The rising price of ore from June to late August is a combination of structure-driven and profit-driven.

The comparison found that during the autumn rose last year, the price difference between high and low grades rose by 97.50%; during the early period of the rise, it only increased by 7.32%; and from June 14 to August 22, the price difference between high and low grades rose by 72.60%. Obviously, the structural shortage of high-grade ore is more significant in the recent round, and it is not as lacking as it was at the beginning of the year. This is indeed the case. The high-profit and high-starting situation of steel mills has not diminished, and the price of superimposed coke has risen even more. The demand for high-grade ore grades has been gradually improved. However, this alone will fully explain the recent round of gains?

After the semi-annual economic data was released on July 17, the ore rose twice, reaching an increase of 14.56% on August 9, which was higher than the previous increase. This shows that the demand resilience behind the economic data and the corresponding strengthening of the industry chain outlook, more or less play a role in the continued rise of the ore. Therefore, the ore rise in June-August has both the supply and demand of high-grade mine logic, raising the cost part of the mine price, and also the economic stability, the expected trend of the industry chain, and the expansion of the mine price. Profit part.

However, whether it is a macroscopic change in the current or a limited production in winter, it has an impact on both the structure and the profit-driven path. For example, the macro-expected revision will affect the profit margin of the black industry chain, and then compress the profit part of the mine price; the limited production will suppress the demand side of the ore, which will lead to a reduction in the cost of the mine price.

Objectively speaking, the risk of lowering the cost part is often in the background, will the profit part be different?

Steel profitability and toughness increase, the main support force of profit part or mineralization price later

The continuous length of profitability of the steel industry this year has reached a high level, which is rare in history. The fundamental reason is that the supply side is completely suppressed. This can be proved from the experience of Japan's production capacity from 1999 to 2008. In the context of relatively stable demand, the industry's gross profit margin was driven by supply contraction, rising to a high level of over 20%, and maintained for more than four years, but relatively market-oriented. Clearing out leads to a relatively slow pace, which is different from domestic. At present, the more rigid supply faces the gap, and it cannot be supplemented at a glance, not to mention the secondary supply contraction of the heating season. At the same time, while the economic data remains to be seen, and the overall demand trend is not yet determined, the tight balance is expected to continue into the second quarter of next year. Therefore, the current profitability and resilience has gradually become the consensus of the market.

Under this pattern, the main part of the profit or the late metallurgical price will support the power.

4.3 Measuring the long-term and short-term central position of the mine price

4.3.1 Long-term central measurement, regardless of the impact of winter production

1. Estimation of iron ore demand in the shipping market in 2017

We use the pig iron output to convert the total demand for iron ore, and then combine the dependence of the outer mine to estimate the ore demand in the world shipping market. The specific basis and assumptions are as follows:

1 Calculate the total iron ore demand (based on 62% grade) based on regional pig iron production;

2 Calculate the demand for iron ore in the marine market in each region based on the dependence of foreign mines;

3 In 2017, the growth rate of pig iron in each region was compared with the growth rate of pig iron production in the previous year.

2 , the cost part of the mine price

The cost part of the ore price is based on the adjusted ore cost curve. The corresponding price of the ore demand in 2017 is the part of the price of the ore price. The specific assumptions and basis are as follows:

1 Based on the iron ore supply cost curve announced by Rio Tinto in the 2015 Interim Report, considering the new low-cost production capacity of 140 million tons in 2016-2017, the low value range of the ore cost curve is continuously extended, and the supply cost curve is continuously moving down. In this way, the iron ore cost curve is adjusted;

2 Further adopting the weight change of the weighted cash cost of the four major mines to estimate the downward shift of the cost curve, so as to obtain the current iron ore supply curve;

3 The marginal supply cost corresponding to the iron ore demand in the shipping market in 2017 can be approximated as the price center of the cost part of the mine price.

Taking into account the above factors, it is estimated that the iron ore cost partial equilibrium price is about 46 US dollars.

3. The profit part of the mine price

The more profitable steel companies are, the higher their tolerance for the profit of the ore.

1Before 2017, the profit part of the mine price was obtained by subtracting the cost of the current year from the average price of Platts in the current year (based on the total annual ore demand for the annual cost curve). Therefore, the value of the 2016 profit is calculated by the Platts Index's current average of US$58.4/ton, which is subtracted from the estimated 2016 mineral price cost value of US$50.18/ton, which is US$8.20/ton, and is used as a measure for 2017. The profit is based in part.

2 Then through the 2016-2017 steel gross profit change to simulate the change in the profit of the mine price, the corresponding ratio is obtained, multiplied by the profit portion of 2016, and the profit portion of 2017 is estimated to be about 14.3 US dollars / ton.

3 Finally, combined with the above-mentioned price of the mine price and the profit part, it is estimated that the future ore center price is expected to fluctuate around $60/ton.

In addition, it will be found that the profit in the previous mineral price is basically consistent with the change in the profit of the industrial chain. Since 2013, it has shown a trend of decline and then rise, and 2015 is the bottom.

4.3.2 Short-term central measurement, considering the impact of winter production restrictions

n “2+26 ” urban environmental protection production impact measurement: affecting the total supply of about 37.1 million tons, accounting for about 14% of the national current period

This year is the "Air Pollution Prevention and Control Action Plan", referred to as the "Gas Ten" assessment year. The concentration of fine particulate matter in the Beijing-Tianjin-Hebei region is about 25% lower than that in 2016. The annual average concentration of fine particulate matter in Beijing is more strictly controlled at 60. Micrograms per cubic meter, and this year's air pollution in parts of Beijing, Tianjin and Hebei did not fall. In this context, the Ministry of Environmental Protection and various levels of government have introduced policies such as the plan to limit production in autumn and winter.

As of September 29, 2017, a total of 10 cities explicitly mentioned 50% of production capacity, including Tianjin, Shijiazhuang, Tangshan, Handan, Changzhi, Jincheng, Zibo, Anyang, Jiaozuo, Zhengzhou, involving crude steel production capacity of about 254.6 million tons. The “2+26” city as a whole involves a production capacity of approximately 318.6 million tons.

The following is an estimate of the impact of limited production on steel supply. The calculation assumptions and basis are as follows:

1Because the urban steel production capacity and production data within the measurement range are all based on 2016 data, but the supply release is more sufficient in 2017, resulting in the same blast furnace capacity utilization situation, the crude steel output is growing, so the 2017 heating season (11.15-the next year) 3.15) blast furnace capacity utilization rate, using the blast furnace steel output in the first eight months of 2017, the growth rate of 3.38% (see Table 14 for specific calculation), combined with the blast furnace capacity utilization rate of 82.19% in the heating season of 2016, the capacity utilization rate is 84.97%;

2 In the scenario where the production capacity is limited to 50%, the capacity utilization rate is reduced from 84.97% to 50%;

3 Under the condition of limited production and production, the capacity utilization rate after the implementation of production restriction decreased from 84.97% to 42.48%.

The measurement results of the limited production on the supply end indicate that during the heating period in 2017, the “2+26” city will be limited in production based on a 50% reduction in steel production capacity, and the “2+26” urban crude steel output will be reduced by approximately 37.1 million tons, accounting for the national total. The current production is about 14%.

n “2+26 ” urban environmental protection production is expected to reduce the demand for ore by about 59 million tons, causing the mine price to fall by about US$3.9/ton

According to the above calculations, the “2+26” urban production capacity limit of 50% affects 37.13 million tons of crude steel output, corresponding to the reduction of iron ore demand of 59.89 million tons (based on 62% grade), combined with the supply cost curve, while assuming equilibrium Part of the price profit is not implemented. It is estimated that the Platts Index equilibrium price is expected to fall by about US$3.90/ton from about US$60.6/ton to about US$56.7/ton, which is about 6.38%.

risk warning:

1. Terminal demand is more volatile than expected.

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