Steel trade will evolve towards "point price"

The "point price" pricing method makes trade prices more closely related to market changes. It also allows companies to obtain a balance price that the market can accept without using a lot of manpower and material resources, thereby promoting industrial upgrading of the steel trade.

The steel industry is an important basic industry of the national economy and an important symbol of the country’s economic level and overall national strength. In the 21st century, with the further advancement of China's market economy, the monopolistic status of steel prices for prices is being broken, the frequency of pricing has accelerated and the index has been closed, and the demand for steel trade companies to hedging trade risks through futures has been expanding, and will go toward the futures era. Become inevitable.

Since the end of the sweet period, since the 21st century, with the rapid development of the economy and the gradual enhancement of comprehensive national strength, China’s steel production has continued to grow exponentially. The continuous increase in steel production is not necessarily a boon for steel companies. From 2000 to 2007, China's steel industry developed rapidly, and the average income level remained above 10%. In the second half of 2008, when the international financial crisis broke out, industry profits fell sharply, and the yield rate fell to the bottom. Although it gradually fell out of the trough from 2009 to 2010, it was still at a relatively low level. In 2010, the average income level was only 5.21%. Iron and steel enterprises Profitability dropped significantly.

In recent years, overcapacity, iron ore price pricing system has changed, the original pricing model of steel mills has been affected, the previous monopoly pricing is being broken, and the upstream and downstream risk exposures are continuously expanding, making steel companies face increasingly severe challenges.

Overcapacity dragged down the industry In the past 10 years, under the background of rapid growth in market demand, coupled with disorderly administrative approvals and blind investment, the steel industry has rapidly expanded its supply and its production capacity has reached saturation. Low profit and low profit have become the norm in the industry.

Although the country has taken actions to phase out backward production capacity of steel companies, such as the total elimination of 75 million tons of ironmaking capacity during the “Twelfth Five-Year Plan” period, iron and steel enterprises are important to the local economy, and the barriers to capital exit are high, and the overcapacity situation will run through. The 12th Five-Year Plan” continues to squeeze the profits of steel mills.

Iron ore pricing tends to index The accelerated development of China's steel industry has driven the rapid rise in iron ore prices. In addition to the one-round drop in iron ore prices after the financial crisis, the overall increase was staggering. In general, when steel prices rise, iron ore prices rise faster than steel prices; when steel prices fall, iron ore prices can remain high. At present, iron ore is mainly controlled by the hands of three multinational corporations such as BHP Billiton. The concentration of steel companies in China is not high, and they are even more passive in terms of price negotiations. No matter whether the price of steel is up or down, changes in iron ore prices will result in the loss of corporate profits. .

Prior to 2008, the iron ore price adopted the long association model, that is, the price of iron ore supplied by the two parties negotiated in April and May of each year. After 2008, the long association model was changed to partial quarterly pricing, and most steel companies took the spot price. In the past, large-scale steel companies all had a relatively high percentage of long-term coal mines. Long-term coal mines were negotiated in the fourth quarter of the previous year, and remained unchanged for a year thereafter. This is equivalent to locking up the cost of the ore soaring, and steel companies benefited greatly. There is a huge price gap between the long-term mines and the spot mines. Companies with long-term coal mines often raise their prices by handing them to small steel companies to increase profits. The change in the pricing model for annual pricing of iron ore has seriously interfered with the profit level of the existing large steel mills. After the quarterly pricing model, the risks of steel mills at the raw material end have increased significantly.

Take the example of the Qingdao port ore powder mine in Qingdao. Before 2008, due to the implementation of the long-term mine-sharing system, prices performed relatively smoothly during the year. However, there will be more obvious cliffs between different years. This is mainly due to the large differences between the next year's prices after the long negotiations in the fourth quarter. However, after 2008, with annual pricing gradually evolved into a quarterly pricing model, ore price fluctuations are more intense during the year and are more relevant to steel prices.

With the ore pricing system increasingly closer to the spot, the three major mines are gradually seeking index pricing. The international iron ore shipping market and the iron ore index are monopolized. The Platts iron ore index widely adopted by the trade community has already acquired SBB, and SBB's TSI ore index has been widely adopted by the financial community. Mergers and acquisitions have caused the pricing index to become more monopolistic. Taking into account the weak position of steel enterprises relative to mines, once the mine adopts the index pricing model, the existing risk exposure of steel enterprises will further expand.

The speed of pricing of steel mills has accelerated. Past studies have suggested that in an oligopoly market like the steel industry, steel companies can negotiate pricing to enjoy excess profits. In the previous market, whether it was the steel mill pricing model or the trader pricing model, it did show an obvious oligopoly structure. The steel mills sold to traders according to the cost plus a certain profit, and the traders needed it again. Profits are increased layer by layer, making prices downward.

We have observed that the pricing frequency of large-scale steel mills has obviously accelerated. This is exactly how steel companies respond to changes in market trends. Prior to 2003, the pricing of large-scale steel plants was dominated by quarterly pricing. Steel mills seldom considered the market reaction. The pricing was based on the production costs of steel plants plus the required profits. Subsequently, it gradually changed to a monthly pricing model. The ex-factory price was announced once a month. In recent years, the pricing of large-scale steel mills has been changed to a ten-day pricing model, where prices are quoted in the early, middle, and late months of each month. Small and medium sized steel mills are more flexible in their performance. Once the spot market sales are weak, traders' orders are reduced, and steel mills will cut their ex-factory prices the next day to cope with market changes.

The shortening of the factory's factory pricing cycle indicates that steel mills are slipping from the dominant position of oligopoly. In the more intense market competition environment, steel mills have to be closer to the market. This article assumes that the steel mills' returns under different pricing systems show that steel mills will obtain higher profits at higher prices. Under the quarterly pricing, the profit in the steel mill quarter is in the gray part of figure 1, and after the ten-year price is fixed, the profit of the steel mill in the quarter is the gray part in figure 2. It can be seen that in the case of Figure 2, there is less consumer surplus and the steel mills have more benefits.

Steel mills gradually converted from quarterly pricing to ten-day pricing, and the shortened pricing cycle has become a trend. Comparing Fig. 1 with Fig. 2, we can see that if the pricing cycle continues to be shortened, the steel mills will have more profits. In this way, we can deduce the prospects for the development of future steel companies, that is, the pricing cycle is shorter, even closer to the indexed pricing. .

The non-ferrous "point price" or the monopoly of steel mills has become a thing of the past, and the shortening of the pricing cycle is a development trend. Similarly, as the smelting industry, pricing models based on futures market prices for non-ferrous metals companies may provide a useful reference for the development of steel companies.

Iron and steel, as different branches of the metal industry, have more similarities. The application of futures in the non-ferrous industry has taken a long time. The non-ferrous metal industry has formed a market-based pricing system based on futures prices. In spot trading pricing, the average price of non-ferrous futures is widely referenced and applied.

In spot trading such as raw material procurement and product sales, the long-term trade contract “only stipulates product quality, quantity and processing fees, and contract implementation methods and deadlines” replaces the traditional spot sales contract between the enterprise and the customer. The client may determine the contract execution price based on the futures price within the contractual time limit and use the weighted average price of the execution price as a benchmark, plus a certain spot premium, discount or processing fee to determine the contract execution price. The "point price" pricing method makes trade prices more closely related to market changes. It also allows companies to obtain a balance price that the market can accept without using a lot of manpower and material resources, thereby promoting industrial upgrading of the steel trade.

At the same time, we must also note that the current mining industry's call for the index of ore prices has soared, and the steel trade enterprises are facing the pace of speeding up the pace of upstream iron ore production, and the ultimate trend toward index development is a big trend. The evolution of steel trade to “point price” will be a high probability event.

Since the listing of steel futures, hedging through futures is gradually accepted by the market. For iron and steel companies, the upstream faced changes in the iron ore index pricing model. The downstream faced with the dual pressure of shrinking profits and accelerated structural changes in the market price. The pricing model and trade model of the industrial chain in the future will surely change dramatically. It is foreseeable that the steel market will march into the futures era along the footprint of non-ferrous metals.