High Cost Iron Ore Digestion: Cost Pfer From Steel Enterprises To Downstream

　　企業危難

"The price of iron ore will not pose a threat to the company's profits this year."

Facing the price of iron ore negotiations just finalized in 2008, Zhang Wenfeng, deputy general manager of Tianjin Pipe Group Corporation, told reporters.

This part of the cost pressure can be pferred to the downstream.

"The impact of this year's cost increase on the profit growth of WISCO is within the controllable range of WISCO."

Deng Qilin, general manager of Wuhan Iron and Steel Group, holds the same view.

Trading companies also share the same view.

Feng Shuijun, deputy general manager of Sinosteel trading company, told reporters that the price increase of iron ore association has little impact on the company's profit growth.

In the case of ore prices rising by more than 80% over last year, most of the large and medium-sized steel downstream enterprises interviewed by reporters said that the price increase had little impact on the company.

That being the case, why do some of our enterprises have to cry after the end of the negotiations?

Is this really the case?

At the end of February this year, when the price of Brazil Association of valleys and CAS decided to raise the price of 65% this year, Qi Xiangdong, Deputy Secretary General of the China Iron and Steel Industry Association, said in a media interview this March that China's steel industry needs at least 8 billion 400 million yuan more or 60 billion yuan.

The large and medium sized iron and steel enterprises that have long-term contracts in China have a total profit of only about 140000000000 yuan a year.

At present, Australia's ore production is nearly 20% higher than that of Brazil mine. If there is no impact, it may only exist in the imagination.

Taking WISCO as an example, China Union Iron and steel net Niu Wei told reporters that according to the weighted ratio of 3 to 1 of the powder ore and lump ore, the import share of Australia and Pakistan was 60% and 40% respectively. After the iron ore negotiations were concluded in 2008, the average price increase of the iron and steel industry was 73.10%. The FOB price of the imported iron ore in WISCO was 90.20 US dollars / ton, and the weighted sea freight of Beilun, Brazil and Beilun was 48 US dollars / ton, assuming that the exchange rate is 6.9, and the iron ore price is RMB 953.58 yuan / ton.

Wugang's long term shipping agreement accounts for 50% of the total agreement, which requires an additional cost of 25 US dollars / ton of ocean freight, and the price of imported iron ore to the factory is 994.88 yuan / ton.

About 80% of the ores needed for the smelting of WISCO need to be imported, with an import volume of 17 million -2000 tons, and the rest of the spot mines are purchased from the country and their own mines are also produced.

According to the 1.52 tons of iron ore and 1.6 tons of iron concentrate, the cost of ton steel ore in WISCO is 1509.77 yuan.

This year, the cost of steel and iron ore in WISCO increased by 455.13 yuan / ton compared with last year.

2007 iron ore association increased by 9.5%. The cost of Wugang tons of iron and steel in 2007 rose 79.36 yuan / ton compared with 2006. In 2006, iron ore increased by 19%. In the same year, the cost of iron and steel in WISCO increased by 40.70 yuan / ton compared with 2005.

By comparison, according to Niu Wei, this year, the cost of the ore of 50% small and medium iron and steel enterprises in both imported and spot mines is 1924.72 yuan, up 715.41 yuan.

Plus coke and other cost increases, Wuhan Iron and steel costs rose 1115.13 yuan / ton, the cost of small and medium steel mills increased by 1510.14 yuan / ton, the highest increase over the years.

The same is true for Baosteel. At present, more than 90% of Baosteel's iron ore is imported.

In the 2008 fiscal year, the overall increase of iron ore and Baosteel will reach 83%, and the corresponding cost per ton steel will increase by 526 yuan. In addition, the cost of coking coal and the increase of ocean freight fees will be considered, and the cost of tonne steel will be increased by 766 yuan.

Compared with large and medium-sized state-owned enterprises, some private enterprises seem to have a harder time.

"Compared with the domestic steel price changes and the growth of the cost of pig iron, steel prices have not been able to cover the increase in the cost of pig iron this year."

Yangquan coal industry Ren Xiaofeng said.

He believes that the above analysis does not take into account the rise in labor wages and other auxiliary material prices caused by rising electricity prices and economic inflation. On the other hand, the increase in the cost of small and medium steel mills may be larger than the calculated data.

Even according to the calculated data, the current cost increase due to rising fuel consumption has eaten up the steel profits in 2007.

Ren Xiaofeng concluded that "the benefits produced by processing can compensate for the losses caused by the increase in the prices of upstream raw materials, and only medium and small iron and steel enterprises that are smelted without rolling processes can be mercilessly eliminated by the market due to losses."

　　成本轉嫁質疑

Obviously, the so-called "no influence" is just an illusion that iron and steel enterprises get after the cost is pferred to the lower reaches.

At the present time, it seems that there is not much difficulty in pferring costs to downstream.

"As the industry leader, Baosteel's price increase in the two quarter basically offset the impact of rising raw material prices on costs."

Joint securities analysts believe.

"Downstream enterprises such as household appliances, electronic products, automobiles and so on all need to place orders with WISCO first, and some products should still be in short supply."

Wuhan Iron and steel workshop leader told reporters at the cold rolling workshop of Wuhan Iron and steel company.

Deng Qilin told reporters that with the addition of other raw materials, the cost of WISCO increased by about 6000000000 yuan over last year.

However, because high technology and high value-added products account for more than 80% of WISCO's products, WISCO can save nearly 4 billion yuan this year by means of "open source", buying more domestic minerals and increasing the output of its own mines.

According to this "controllable" principle,

600005.SH released its product price in August at the beginning of July. Most of its varieties have different price increases, of which the price of high-end product silicon steel has increased by 2000 yuan / ton.

Can pfer costs become permanent solutions?

Can it be applied to all enterprises and all time periods?

Low trading and high price volatility are the main characteristics of the steel market.

People in the industry have raised doubts about whether it is feasible to "raise the price to pay the cost".

The reason why Baosteel and WISCO can digest the cost of iron ore rise is largely because their products have the right to speak in the domestic market, and at the same time, the enterprises themselves have the advantages of scale and management.

Some large state-owned enterprises with low value-added products may not be able to do so.

Wang Zhijian, senior vice president of investment banking department, said.

According to the data in 2007, there were more than 1400 large, small, super small and all kinds of iron and steel enterprises in China. Moreover, the demand for foreign steel in the steel industry showed signs of slowing down in June, due to the impact of the subprime mortgage crisis and the expected slowdown in global economic growth.

On the premise of the huge difference between domestic and foreign steel prices (the difference between the domestic market price in Shanghai in June and the quotations abroad) is between 130-592 US dollars / ton, there is an automatic adjustment and a trend of shrinkage in the steel export in China.

Even from the recent short term trend of the major domestic steel consuming industries, the real estate industry and the automobile industry, the two industry has seen a "barrier" to the pmission of steel prices.

Therefore, Ren Xiaofeng emphasized that since the price of raw fuel has already begun to encroach on the profit margins of iron and steel enterprises in the early stage, and the macro monetary tightening policy will still be maintained in China, the scale of enterprise liquidity decreases and demand is rising, and the accumulated business risk will be further pmitted to the metallurgical coke market.