Can China's iron ore spot trading platform dominate pricing power?

On the occasion of the establishment of an iron ore trading platform abroad, today, China's iron ore spot trading platform is the first to go online. Whether this "Chinese version" iron ore platform can dominate the international iron ore pricing discourse right is highly appreciated in recent years. The biggest question for Chinese steel companies suffering from the price of minerals. However, the reporter learned from the China Steel Association that the original intention of the platform did not mean the price, and the role of the world's first iron ore trading platform will become more interesting.

China's iron ore platform in the crisis

It is worth noting that from the announcement to the official operation, the Chinese iron ore spot trading platform took less than half a year, and the Singapore iron ore trading platform announced earlier than China has not yet been listed. However, the industry generally believes that there is a bit of forced taste behind such high efficiency.

In recent years, the profits of domestic steel enterprises have been declining. In the first quarter of this year, the steel industry continued to face severe conditions such as weakening market demand, falling steel prices and high raw material prices, resulting in a loss of over 1 billion domestic large and medium-sized steel enterprises. Yuan, the first industry-wide loss in the past 12 years.

In the face of the crisis of survival, the Chinese steel industry is in urgent need of a more reasonable and scientific iron ore trading method. Therefore, following the launch of the China Iron Ore Index last year, the China Iron Ore Spot Trading Platform, jointly sponsored by the China Iron and Steel Industry Association, China National Minerals Co., Ltd. and the Beijing International Mining Rights Exchange, was announced at the beginning of this year and is scheduled to be established at 5 It was officially launched on the 8th of the month. At present, Baosteel, Anshan Iron and Steel, Wuhan Iron and Steel, Shougang, Hebei Iron and Steel and other four major mines have become the launching members of the platform.

In addition to the urgent needs of domestic steel companies, the “foreign enemy” Singapore iron ore trading platform has also made the Chinese platform a success. Many steel companies still remember that the attitude of the Chinese steel industry to the establishment of an iron ore spot trading platform was very conservative two or three years ago. In 2009, the Rizhao International Iron Ore Trading Center, which was initiated by domestic traders, was renamed and rectified by China Steel Association in just one month. The reason is that traders' speculations have distorted the price of minerals and interfered with the ore market, causing large fluctuations in the price of minerals.

However, since the collapse of the annual long association mechanism, the Platts index became the basis for the quarterly pricing of iron ore, but it was also questioned because the data sources were not public. Later, BHP Billiton began to build a new iron ore spot trading platform in Singapore, which is considered to be another attack launched by the mine to achieve iron ore financialization. Last year, Chinese steel companies and related industry insiders organized a delegation to visit the Singapore trading platform, but after returning home, everyone reached a consensus, "If Chinese companies join, the result is still led by outsiders." At this point, it is imperative to build your own platform.

Can't cut prices, what can I do?

In fact, it is not difficult to set up a platform. How to get support from overseas mines is a major problem facing the establishment of China's iron ore trading platform. Because in the iron ore field, including Brazil's Vale and Australia's BHP Billiton, Rio Tinto three major mines occupy an absolute dominant position, the lack of three major mine platforms simply can not talk about market influence. Now, it seems that the concerns about international popularity are somewhat over-considered, because the three major mines have announced their participation in the Chinese iron ore trading platform in just 20 days. However, despite this, the game between overseas mines and domestic steel companies and even the entire Chinese iron ore market is far from over.

Many people in the industry believe that international mines have their own goals. For example, FMG, the fourth largest mine to be announced, has not only a Chinese-funded background, but more than 90% of its market is in China.

Similar to FMG, the addition of Vale, the world's largest iron ore producer, seems to be less suspenseful. As is known to all, compared with Australia's BHP Billiton and Rio Tinto, Brazil has the longest shipping distance to China and the highest sea freight rates. In order to control the iron ore transportation market from Brazil to China, Vale has been planning to form a fleet of 35 giant cargo ships. However, the Ministry of Transport of China recently blocked the new regulations on the berthing docks of oversized ships. Since then, Vale has repeatedly negotiated with Chinese ports to accept the entry of its giant cargo ships into Hong Kong. At this critical juncture, Vale will certainly not give up the opportunity to show China by joining the platform.

Subsequently, the joining of Rio Tinto and BHP Billiton is even more logical, because they are obviously not willing to let other mines take the lead in spot trading. However, it should be noted that with the participation of international miners, it does not mean that China will have a greater say in the international iron ore trade. The relevant person in charge of the China Iron and Steel Association said bluntly, "China (iron ore) platform does not want to control prices, nor does it have this capability." In response to this statement, a responsible person of a steel enterprise that did not want to be named shouted in an interview with reporters. "Can't cut the price of this platform."

In this regard, Wang Xiaoqi, vice president of China Steel Association, pointed out that China is currently the world's largest importer of iron ore, accounting for 60% of global trade, and is also the world's largest iron ore spot market. After the establishment of the iron ore spot trading platform, the transaction price will be more transparent, reducing the number of artificial malicious speculation. Yesterday, Wang Chunsheng, deputy secretary-general of China Steel Association, also told reporters that the reason for establishing the platform is to make the transaction more fair, open and more realistic to reflect the relationship between supply and demand.

“Compared with the Singapore platform being built, China is the world's largest buyer of iron ore, which is more suitable for the establishment of a spot trading platform. At the same time, the Chinese market is broader and participants are more active. If the platform is in Singapore, Chinese companies will face many unfavorable factors, such as the long distance of transportation, and we do not know much about Singapore's local laws, regulations, culture, etc., which increases the difficulty of operation. In addition, the sellers of the Singapore platform are mainly international mining giants. On the Chinese platform, it can give domestic miners more room for development," said Wang Chunsheng.

Is the platform is also a new battlefield

Although it shows that it is only for a more transparent trading environment, but because the current iron ore price is affecting many sensitive nerves, China's iron ore trading platform is bound to become another "battlefield" for China's steel industry and international mines.

Recently, there is news that Hebei Steel Works joined the platform members "very positive." Steel mills believe that the trading platform means that the cost of mining prices will be pushed down. It has been estimated that in the first two months of this year, the iron ore import price will be lowered by US$2, and the Hebei steel industry's total loss of 200 million yuan will be “smoothed”.

In fact, the views of Hebei iron and steel enterprises represent many Chinese steel companies. Due to the strong domestic demand in China, iron ore prices have risen sharply in the past few years. The price of imported iron ore from 2000 was about 20-30 US dollars per ton. The highest approach is 200 US dollars per ton, which also makes iron ore. Once known as the "crazy stone", the price has doubled continuously, and Chinese steel companies have to pay hundreds of billions of dollars each year to mine. In 2011, Rio Tinto, BHP Billiton and Vale's net profit reached US$38.6 billion, about three times the profit of 77 large and medium-sized steel companies in China.

On the other hand, since the second half of 2011, the profit margin of China's steel industry has declined overall. Since the beginning of this year, its operating conditions have further deteriorated, and it has fallen into a loss-making state throughout the industry, and the demand for imported iron ore has also decreased. . The three major mine expansion plans have been on the line, at this time, the three major mines certainly will not let the Chinese iron ore platform to lower prices. It can be expected that the price war between domestic steel companies and mines will spread to the Internet through the platform.

It is also understood that the agreement signed between the China Iron Ore Platform and the three major mines does not carry any additional conditions. In other words, the three major mines can also join the Singapore trading platform. In this case, the dispute between the two platforms is bound to earn the attention of the outside world. It can be said that China's iron ore trading platform has been destined to grow in the spotlight since its inception.

Mechanism and transaction volume

After the opening of China's iron ore spot trading platform, the challenges behind it cannot be ignored. “The Chinese platform is inferior to Singapore in terms of experience. The way of this kind of spot trading platform is imported to China. Singapore’s Global COAL coal trading platform has been in operation for many years, and the Chinese iron ore platform is inspired by it. It can be seen that China is still young in terms of operational experience,” said a staff member who participated in the China Iron Ore Spot Trading Platform.

The above-mentioned staff also said that iron ore is highly restrictive in terms of supply. Due to the monopoly of international miners, resources are uncontrollable for China. That is to say, if the international miners supply insufficiently, then the Chinese iron ore spot trading platform will be very passive in operation.

Xu Xiangchun, director of the information network of my steel network, analyzed that the iron ore spot trading platform is a brand-new model. Although everyone has high hopes for it, it still has a wait-and-see attitude in the early stage. For any trading platform, the amount of trading determines whether the platform has a solid market impact. At present, even major companies including the three major mines have joined, but the amount of resources that can finally be put on the platform is still unknown.

Lange Steel Network analyst Zhang Lin also believes that the main income of China's iron ore trading platform comes from the transaction commission, if the transaction volume is not enough, then the platform will be difficult to maintain normal operation. “Compared with traditional spot trading methods, the sales cost of platform trading is likely to be higher, and its own advantages have not yet been exerted. It is difficult to attract mines to put a large amount of ore on the platform for sales.” Zhang Lin said. Not only that, the iron ore spot trading platform is more complicated than the traditional iron ore spot trade, because it needs to increase the freezing margin and settlement, and it is difficult for steel mills to maintain long-term customer relationships through this platform.

Even more incomprehensible is that China's iron ore spot trading platform claims to adhere to the principle of spot trading, not developing futures, swaps and other financial derivatives businesses. Such a pure spot trading mechanism that rejects financialization and even lacks hedging functions may be difficult to help steel mills lock in costs and mitigate the risk of price fluctuations. Without this function, its attractiveness to steel companies will also be weakened.

Xu Xiangchun also concluded that from the current market relationship, the three major mines have been occupying a dominant position in recent years, mainly because the supply is far less than demand. Before 2005, China's iron ore import demand was relatively small. "At that time, overseas mines would ask Chinese companies to buy mines." It can be seen that as long as the steel mill does not control the production capacity and adopts overseas investment in mining and other methods, it will always be difficult to get rid of the situation of being controlled by people.