Posted on 04 Feb 2021
The fundamentals of China’s iron ore market are expected to improve this year from 2020, the China Iron & Steel Association (CISA) predicted when summarizing China's steel industry performance for 2020, elaborating that the country’s demand will ease probably on lower steel output, while supply may increase both from domestic and international miners because of capacity expansions and gradual recoveries in output from the adverse impact of the COVID-19.
However, pricing may remain a concern, according to CISA vice chairman, Luo Tiejun. “Some spot deals via the e-trading platforms and through auctions sometimes post a $7-8/tonne fluctuation in a day, which is a clear illustration of the unreasonableness in today’s pricing mechanism,” Luo was quoted as saying in a China Metallurgical News report dated January 28.
Fundamental changes, thus, are crucial to rectify the pricing mechanism and to restore order in the iron ore market, Mysteel Global understood from the CISA sharing.
Firstly, China should increase supply from its domestic iron ore miners, and to achieve this, the association reiterated the importance of reducing fees and taxations on domestic miners, as currently they are paying 24 different kinds of taxes and fees, or 17.2% of their revenue. Government authorities should also simplify the procedures and quicken the processing for approving new mining projects, CISA argued.
Secondly, China’s domestic steel mills should utilize more steel scrap in steelmaking as scrap is a key substitute for iron ore, it said, and scrap, thus, should be given a 70% of VAT rebate, instead of the 30% it enjoys at present, and all the domestic scrapyards should be issuing invoices, aligning the revenue taxation so as to assess their costs scientifically and systematically, according to CISA.
China has liberalized steel scrap imports starting January 1, 2021, Mysteel Global notes. “This is the first step, but this will by no means satisfy the robust demand from the domestic steel producers, so we will need to figure out how to make the best of the domestic steel scrap resources,” Luo pointed out, adding that the country should remove the 2% tax and other related value-added taxes on imported scrap.
Thirdly, the government should be supporting domestic enterprises in exploiting overseas mining investments and existing capacity expansions. As of now, an incomplete study shows that Chinese firms’ share of overseas iron ore resources has exceeded 24 billion tonnes, which should be developed at a faster pace into projects.
Among the ongoing overseas iron ore project, the Simandou project in Guinea, West Africa, has been progressing smoothly, and some iron ore projects in Western Australia are proceeding, according to Luo, without sharing more details.
As of now, China-invested overseas mines supply about 160 million tonnes/year of iron ore, or 13% of China’s total imports, according to him.
Other than the suggested moves, physical delivery of iron ore futures in China is the most efficient means to constrain the overzealous speculative trading and to maximize the function of the futures as a hedging tool, Luo pointed out. The Dalian Commodity Exchange (DCE), thus, should continue to perfect its delivery terms and conditions, and to update premiums and discounts to reflect the real market situation to facilitate deliveries, he added.
He noted that on January 27, DCE added four more iron ore brands for delivery and also updated the differentials.
In 2020, China imported 1.17 billion tonnes of iron ore, up 9.5% on year, and the price averaged $101.7/t CFC China for the whole year last year, or up 7.2% on year.
Source:Mysteel Global
