Financial Services Association, December 30 (Reporter Zhang Liangde) In 2023, due to macroeconomic policy support and market demand support throughout the year, iron ore prices showed a “V” trend. The profitability of mining companies increased quarterly starting in the second quarter, and prices reached a peak throughout the year. Overall, the industry expects the profitability of relevant listed companies in the fourth quarter to be the highest for the whole year.

Some industry analysts expect that with the increase in domestic and foreign mine supply in 2024, iron ore prices will show an overall price trend of higher and lower prices, and the market price center may decline slightly.

Strong overall performance in the V-shaped price trend of iron ore supply and demand during the year

In 2023, iron ore showed a pattern of strong supply and demand. There was a year-on-year increase on both the supply and demand sides. However, low domestic port inventories and steel companies' inventories caused the market supply and demand balance to be skewed towards the supply side, and the overall iron ore market price was still high.

The overall trend of iron ore prices in 2023 is in a “V” shape. The fluctuation range is smaller than last year. The annual price trend can be mainly divided into three bands.

From the beginning of the year to mid-March, as domestic epidemic prevention policies were adjusted, compounded by domestic macroeconomic policies, market demand expectations were improving. Under the influence of market expectations for the “Golden Three Silver Four” peak season, steel mills resumed production and iron ore production increased rapidly, and overall iron ore prices remained high. At the time, the market expected a recovery in the domestic economy, and there was room for further improvement in supply and demand for black commodities in the later stages. The focus of the market game was more on the strength and pace of the recovery in demand.

By mid-late March, weakening economic data falsified the strong recovery logic of the early period. The market's expectations for “gold three silver four” fell short, and demand performance in the real estate market was poor. Although iron and water production remained high, terminal demand expectations declined, compounded by rising overseas macro risk expectations. Domestic and foreign market sentiment began to weaken, iron ore prices showed a sharp correction, and hit an annual low in May this year. Domestic iron ore prices were close to 600 yuan/ton. Xiao Wei, an analyst at the Iron Ore Division of the Shanghai Steel Union, told the Financial Federation reporter that 600 yuan/ton is a completely cost-intensive range for domestic mines.

The rapid price drop of iron ore at this stage also caused some domestic steel companies to experience large losses due to large inventories of high-priced raw materials in the early period. For example, in Ma Steel Co., Ltd. (600808.SH)'s financial data for the second quarter, product gross margin fell to a negative value, causing the company to lose 1,726 billion yuan in a single quarter.

However, some steel companies drastically reduced their stocks at this stage, reducing raw fuel to a lower level. Although it helped enterprises reduce production costs at this stage, the low inventory strategy instead became a driving factor for the rise in raw fuel prices in the later stages.

Since the end of May, iron ore prices have continued to rise. Among them, market sentiment strengthened in June and July due to macroeconomic policy expectations, which supported iron ore prices, and prices rebounded from the bottom range. Since August and September, steel mill profits have recovered, and steel companies' procurement has increased. Under the influence of the early low inventory strategy, iron ore prices experienced the biggest price increase of about 200 yuan/ton. However, after October, iron ore prices finally rose above the 1,000 yuan/ton mark at the end of the year due to strong macro-favorable expectations such as trillions of treasury bonds. At the same time, due to the fact that the crude steel reduction policy hyped up in the early stages fell short of expectations and the reality that steel companies and ports had low stocks of raw materials, iron ore prices finally rose above the 1,000 yuan/ton mark at the end of the year.

However, the high price of iron ore has also forced steel companies to maintain a strategy of low raw material inventories. Xiao Wei said that according to data, inland steel companies currently have regular stocks for about 1 month, while the lowest coastal steel mills only maintain inventory for more than a week.

Industrial chain profits are still on the ore side, and the price center is expected to drop slightly next year

During the year, the main profits of the steel industry chain were once again taken away by upstream iron ore manufacturers. There were many poor iron ore mines and few rich minerals in China, so 80% of China's iron ore was imported, and domestic steel companies did not have the right to talk about iron ore pricing. In the global iron ore supply pattern, Australia and Brazil account for more than 50% of the world's iron ore production, and as much as 70% of global trade. In 2022, China's iron ore imports from Brazil and Australia accounted for 88% of total imports. Iron ore supply is highly concentrated, and the supply side has a stronger voice.

It can also be seen from the financial reports of steel companies and iron ore companies that the resource side has taken away the main profits of the industrial chain. BHP Billiton (BHP)'s first half results show that the company's revenue for the first half of the year was US$54.21 billion, and the company's net profit returned to mother of US$12.92 billion. Although net profit fell by more than 50% due to falling prices of minerals such as iron ore, the net sales margin was still as high as 26.42%. Dazhong Mining (001203.SZ)'s net profit for the first three quarters was 829 million yuan, and the net sales margin was 29.2%. Compared with the net profit of leading steel company Baosteel Co., Ltd. (600019.SH) in the first three quarters of RMB 8.35 billion, the net sales margin was only 3.79%.

Meanwhile, the rise in iron ore prices in the fourth quarter may push mining companies' profitability to rise again this year. A number of workers from listed iron ore companies told CFA reporters: “Iron ore prices rose quite sharply in the fourth quarter, which is expected to be beneficial to the company's performance this quarter.”

Industry insiders expect iron ore prices to remain at a high level next year, but the price center may have declined somewhat from the present. Xiao Wei expects the average iron ore price to decline in 2024, and the average forecast value is around 110 US dollars. Meanwhile, Benchmark Mineral Intelligence (BMI), a subsidiary of Fitch Solutions, expects the average price of iron ore to be $120/ton in 2024.

However, under high prices, domestic iron ore companies are currently not feeling a weakening in market demand. A person from a listed domestic iron ore company told the Financial Association reporter: “Currently, demand for iron ore from the company's downstream customers is still strong. I personally think the demand performance of downstream steel companies next year may be better than this year, and I am still quite optimistic about the iron ore market.”

According to Mysteel's forecast, global iron ore production may increase by 62 million tons next year, while global pig iron production may increase by 16.6 million tons, corresponding to iron ore consumption of 26.5 million tons. Supply is 35.5 million tons more than consumption, and iron ore supply may gradually ease.