Steel prices in China, Europe and other places have been sharply reduced, iron ore supply has grown steadily, and downstream steel prices have plummeted, making iron ore prices soar after October. As a result, Vale, one of the global mining giants, put forward a deal to make up for the difference, and the quarterly price further moved closer to the spot mine.

However, the spot price of iron ore breaks the balance of interests, and price instability is a problem for both mining companies and steel mills. As a result, although iron ore pricing has a tendency of spotting, the long-term signing between miners and steel mills The contract will remain an important part of the market.

After October, the spot price of iron ore began to drastically drop. At the end of October, the CIF for 63.5% of Indian ore imported from Tianjin Port was US$128-130/ton, which was US$50/ton lower than the end of September. It is still at a low position and is currently quoted at US$137-139/ton in mid-November.

Supply and demand reversal ore market to accelerate the spot

"Jinjiuyinshi" is the traditional peak season for the steel market. However, in September and October this year, the steel market suffered a cold winter, and the entire industry cut its output and cut prices.

According to the commercial forecast and monitoring of the Ministry of Commerce, in the first ten days of November, the domestic steel price fell for eleven consecutive weeks, with a cumulative decrease of 9.5% from the mid-August. The industry significantly reduced production. According to the National Bureau of Statistics, the national average daily average output of crude steel and steel in October was 1.764 million tons and 2.357 million tons, respectively, a decrease of 6.7% and 7.4% from the previous period.

In the downturn of the downstream industry, the demand for iron ore fell sharply. According to customs statistics, China imported 49.94 million tons of iron ore in October, a year-on-year drop of 5% and a year-on-year decrease of 15.5%.

The storm of production cuts has not been spared in the international market. European countries plagued by the debt crisis have become the hardest-hit areas. Important steel mills have announced production cuts. As of the end of October, ArcelorMittal shut down some of the blast furnaces and electric furnaces in Europe. ThyssenKrupp announced that it will cut its position in Europe in the fourth quarter. Steel production is 500,000 tons.

On the other hand, global ore production has grown steadily.

In 2011, the global mining investment trend triggered by the financial crisis began to enter the production period, and new ore production capacity was released, resulting in a significant increase in iron ore production.

In addition to Rio Tinto in the four major mines, the production of iron ore in the other three major mines hit a record high.

Statistics show that in the third quarter, the four major mines produced a total of 177 million tons of iron ore, a year-on-year increase of 11.2% and an increase of 9.6%. Among them, Vale's iron ore production in the third quarter was 87.9 million tons, an increase of 10% year-on-year, an increase of 13.5%; BHP Billiton's iron ore production in the third quarter was 39.57 million tons, an increase of 23.7% year-on-year, an increase of 11.4%; FMG third quarter The output of iron ore was 15.84 million tons, a year-on-year increase of 62.5%, an increase of 27.7% from the previous period; Rio Tinto’s iron ore production in the third quarter was 49.83 million tons, an increase of 4.7% year-on-year, an increase of 2.0% from the previous month, second only to the fourth in 2010. Quarterly record high of 5,050 tons.

In October, the relationship between supply and demand in the iron ore market was reversed, the spot mine fell sharply, and the system defect of the agreement mine leaked out. Brazil’s CVRD voluntarily adjusted its fourth-quarter iron ore price from US$175/tonne to US$160/tonne, but unfortunately the spot market saw a larger decline. The port ore spot iron ore price fell to US$130/ton. .

Domestic steel mills have started to demand a reduction in the price of the agreed mines, and some steel companies are unwilling to perform the original fourth-quarter contract price. The international mining company compromised and Vale sent a letter saying that in view of the new changes in the iron ore market, it decided to adjust the iron ore price in the fourth quarter according to the index price of the current period. The steel mills taking delivery in October could first follow an index on September 30th. The price as the pick-up price, after the end of the fourth quarter, the two parties will settle according to the average price of the current quarter index, that is, the transaction will go back to make up the difference.

On the surface is the victory of the steel mills, in fact, this move also shows that Vale will further close quarterly prices to the spot mine, pushing iron ore pricing mechanism from the quarterly contract into the spot trading.

Martin Vals, executive director of Vale's iron ore division, said that he is negotiating with Chinese customers one by one and that he may adopt measures based on actual average prices to replace the quarterly pricing model adopted since April 2010.

The spot of imported ore has the disadvantages for the steel mills of mine enterprises

In the era of long-term coal mines, the agreement ore and spot ore mines were at odds with each other and could maintain a balance. However, entering the 21st century, global supply and demand in the ore market is imbalanced, industry price volatility intensifies, and the status of mining companies and steel mills is unbalanced, which continues to impact the ore market, leading to disputes in the agreement ore market and the iron ore market is no longer balanced.

In the traditional sense, the iron ore agreement mine is far away, the market shuffles, and the trading system is re-established. The pricing mechanism becomes the core.

The contract period is gradually shortened or directly transferred to spot mines, which will directly affect the operation of ore enterprises.

The overall market value of iron ore is greater than that of other varieties, and the inherent characteristics of low unit price and large market value determine that iron ore is not as prosperous as financial markets such as non-ferrous metals and precious metals, and terminal demand is hampered by steel mills. It is difficult for ore enterprises to set aside steel prices. Even spot sales still necessitate consultations with various steel mills, and it is not possible to throw a large amount of ore directly to the spot market.

At present, mining companies have adopted an alternative method and have emerged in the form of short-term agreement minerals. However, there are high risks in short-term agreement minerals. Experience has shown that when the price of the agreement is lower than the market price, the ore company has the possibility of reducing supply, and when the market price is lower than the agreed price, the steel company has the incentive to reduce the purchase. Regardless of the default risk of the quarterly or monthly mines, and the default is two-way, both mining enterprises and steel companies have this possibility.

On the other hand, the spot price of imported ore is not good for steel mills. The agreement mine is more important for steel mills. By stabilizing the transaction, some price discounts can be obtained. At the same time, the raw materials can be stabilized, and the enterprises can be assured of scheduling, which is beneficial to improving the production efficiency of the company.

At present, the price of iron ore is declining, and it is more advantageous for steel companies to adopt spot pricing. However, in the long run, spot mines will increase the procurement of raw materials for enterprises, and the sharp rise or fall in ore prices will affect the stable production of steel companies.

Also, we must refer to the choice of Japanese steel mills. On October 25th, Japanese steel makers JFE Holdings and Sumitomo Metal Industries stated that despite the sudden drop in spot market prices, they will not cancel the October-December iron ore contracts.

The president of Japan Iron & Steel Alliance League Co. Lin Tian Yingzhi stated: "When the market conditions are not good, we can cancel the contract and switch to spot purchase. This is a violation of our tenet. We believe that the cost of raw materials should remain stable."