The Influence of Sea Freight on the Imported Iron Ore Price in China and Countermeasures

The annual ore price negotiations lock the FOB of the year, and the key factor affecting the CIF is sea freight. The fluctuation of sea freight has led to the fluctuation of the current ore price. The current ore price is the standard for iron ore price negotiations in the next year. In recent years, with the continuous rise in the price of iron ore shipping, China's iron and steel companies have complained. International oligopolistic merchants often resort to speculation to increase sea freight, in order to gain greater bargaining power in negotiations.

In recent years, the China Iron and Steel Association has spent a lot of energy in negotiating with the three giants of iron ore, and has, to a certain extent, ignored the concern for sea freight. In fact, compared with the price of iron ore, the changes in the shipping market and shipping charges have a greater impact on the procurement costs of steel companies. In the iron ore negotiations in 2009, the China Iron and Steel Association has always emphasized that prices have fallen by at least 40%. In fact, the price after a 40% drop is only US$6/t compared with the “original price” reached by Japan and Rio Tinto. difference. According to relevant data, from January to November 2009, spot sea freight from ports in Brazil and Australia to ports in China increased by approximately US$40/t and US$10/t, respectively. Compared with the price of iron ore, the cost of shipping increased. The impact on domestic steel companies is obviously much greater. Although China has obtained greater preferential prices in iron ore, it has lost more in shipping expenses.

1 Effect of sea freight fluctuation on iron ore import costs

1.1 Changes in sea freight directly affect the CIF price

From the relevant data in recent years, the proportion of imported iron ore sea freight charges to CIF prices is on the rise. For the first time in 2003, there was a phenomenon that freight was higher than the price of goods. In 2004, sea freight accounted for the highest percentage of CIF prices, which was 62%.

The iron ore sea freight is a major part of the CIF price that makes up the imported iron ore, so the ups and downs of sea freight will directly affect the fluctuation of the CIF price. For example, in January-August 2008, the bulk cargo shipping market continued to heat up, and shipping charges continued to climb. The average CIF prices of imported mines in major source countries all increased in different degrees. After September, the average CIF price also decreased with the decline in ocean freight rates. begin descending.

The rise in sea freight will inevitably lead to an increase in the CIF price, but when the sea freight falls, the decline in CIF prices is quite slow, which means that the impact of the increase in sea freight on the CIF price is persistent. This is mainly because sea freight charges the FOB price that is an important part of the CIF price, and it is often used after one year. When sea freight declined slightly, the CIF price decline due to FOB price increase was not as large as sea freight.

1.2 The interaction between sea freight and FOB price

Before 2003, FOB prices of iron ore in major importing countries in China remained basically balanced. In 2004, the balance was broken, FOB prices rose by 18.6%, the spot price of iron ore imported from India rose, and sea freight rose rapidly, which ultimately drove the CIF prices in Brazil and Australia to soar. As the spot price is the standard for the negotiation of iron ore price, the 3 giants in 2005 put forward the request for price increase of iron ore on the ground of high spot prices, and finally reached the goal of 71.5% price increase. From 2005 to 2006, although sea freight declined but remained high, the FOB price rose by 19% in 2006 and rose by 9.5% in 2007. After the FOB price of iron ore continued to increase, the increase in ocean freight in 2007 once again peaked and exceeded that in 2004, and the average freight rate for iron ore from Brazil to China reached US$41.89 per tonne.

The price of iron ore in Australia and Brazil is dominated by the annual contract price. The change in the CIF price mainly depends on the rise and fall of freight, so the import price is relatively stable. The price of iron ore in India is determined by the market trend, and the price fluctuates greatly. The rise in sea freight rates is one of the important reasons for the sharp rise in iron ore CIF prices. International iron ore sea freight fluctuations have a direct impact on China's imported iron ore CIF price changes.

2 Reasons for abnormal fluctuations in shipping charges

The continuous rise in sea freight has made it even more difficult for China’s iron and steel companies, which have little profits. The reasons for the “strange increase” in ocean freight are mainly analyzed from the aspects of world capacity, domestic capacity, domestic steel prices, and foreign iron ore suppliers.

2.1 Global iron ore capacity is tight

Since 2001, the world's iron ore trade volume growth rate has been higher than the growth rate of bulk carrier capacity, and it is also higher than the growth rate of Haishu and Panamax shipping capacity. The capacity of bulk carriers cannot meet the increasing demand for iron ore traffic, so shipping costs must rise. India’s export tariffs on iron ore have forced China to shift its demand for India to Australia, Brazil and South Africa, which has stretched the distance and shipping schedules and increased the strain on capacity. Except that the growth rate of iron ore trade volume in 2007 was lower than the growth rate of bulk carrier capacity, the growth rate of bulk cargo capacity was basically unable to catch up with the growth rate of iron ore trade volume.

2.2 Insufficient domestic professional fleet capacity

At present, ocean-going ore-laden ships and super-large bulk carriers are mainly engaged in the transport of ocean-going ore, and their transport volume accounts for more than 75% of the world's ocean-going iron ore shipments. Panama-type ships are mainly engaged in the transport of oceanic ore. Although China is a major shipping country, there are a small number of sea-hull vessels, and the iron ore professional transportation vessels are relatively small. There are 720 ultra-large jellyfish-type vessels of over 130,000 t in the world, while China only has 30 vessels, which are obviously at a disadvantage in terms of transport capacity.

Due to the restrictions imposed by India's shipping terminals, there are many large handy bulk carriers on the Indian route. In the iron ore route from Brazil and Australia’s west coast to China, the largest ship carrying iron ore imported domestically is about 160,000 tons. There are even 70,000 tons of Panamax ships and 388,000 tons of ore from Brazil’s CVRD. Compared to a ship, it is definitely not an economic ship.

The current world shipping market is controlled by shipping developed countries. Among the world's 10 largest bulk cargo shipping companies, 3 are Japanese companies, and the rest are European companies. Due to the lack of domestic capacity, iron and steel companies lease a large number of foreign ships. At present, 90% of China's seaborne iron ore is shipped by foreign vessels. Judging from the long-term transportation contract (COA) signed by our steel companies, most of the long-term transportation contracts are signed to foreign shipping companies.

2.3 The situation of domestic iron and steel enterprises is complicated

2.3.1 Low concentration of steel industry

There are more than 800 crude steel production enterprises in China, and the average production scale is less than 1 million tons. In recent years, although the concentration of steel industry in China has risen, it is still not ideal. In 2005, the total production capacity of the top 10 iron and steel enterprises accounted for only 36.89% of the country's total output. There were only 8 iron and steel enterprises with output exceeding 10 million tons; in 2006, the total output of crude steel of the top 10 steel companies did not total. To 50% of the country's total production. Iron ore import companies are too fragmented to form economies of scale. There were 500 companies with import qualifications in 2005 and 120 in 2006. Compared with the degree of industrial concentration in the world's major steel-producing countries, the degree of concentration of China's steel industry is relatively low.

As the current maritime vessels are in the hands of a handful of international consortiums, the industrial concentration of China's iron ore importing companies is quite low, which can easily lead to blind imports and competitive bidding, making it difficult to grasp the right to speak at sea.

2.3.2 The proportion of long-term transport contracts is low

The signing of a long-term transportation contract can effectively avoid the risks caused by shipping price fluctuations. However, most of the iron and steel enterprises in China have not signed long-term agreements with shipping companies because of their small scale and lack of awareness. Instead, they use a spot tender for chartering. . A few large companies such as Baosteel, Wuhan Iron and Steel, and Shagang have signed long-term transportation contracts, but their transport volume accounts for only about 15% of the country’s imported iron ore. The long-term transportation contracts signed between Japan's Nippon Steel and South Korea's Pohang and other large-scale shipping companies accounted for 70% of the total volume. Market speculators have little room for speculation and the freight rates are relatively stable.

In addition to large iron and steel companies such as Baosteel, which insist on offshore transportation in iron ore transactions, many small and medium-sized steel enterprises in China adopt the trade model of “iron and steel companies pay money and mine companies book ships”. This is very detrimental to China's steel companies and is also the main reason for the abnormally high seaborne price. From the comparison of the average seaborne iron ore freight rates between China and Japan in January-November 2007, we can see that Japan’s ability to resist maritime freight risk is much stronger than ours.

2.4 Foreign iron ore suppliers pull up sea prices

The current ore price is the standard for iron ore price negotiations in the next year. In order to negotiate a momentum for ore, foreign iron ore suppliers will increase the price of iron ore in addition to the price of iron ore, in order to achieve the purpose of rapidly increasing the spot price of iron ore.

In April 2006, when the negotiations entered the fourth round, BHP Billiton, the main supplier of iron ore, suddenly increased the number of chartered vessels, leading to an increase in the iron ore shipping market price. The freight rates from Brazil and Western Australia to China rose by US$7/t to US$24/t and US$13/t respectively.

In 2010, iron ore suppliers repeated their mistakes. At present, China's spot price is 27% higher than the benchmark price. This fact will become the basis for negotiations in 2011. Every year when iron ore negotiations enter a sensitive period before the showdown, heavyweight participants and speculative tenants in the FFA market continue to be on schedule and on timetables given the tight supply capacity of the ships in Hong Kong. The market has concluded a large number of contracts, and the volume of medium and long-term leases has soared to make the capacity even more tense.

3 Countermeasures and Suggestions

3.1 Build its own professional fleet

China has a solid foundation for shipbuilding. At present, China can build all kinds of high-end products such as bulk carriers, oil tankers, chemical tankers, passenger ro-ro ships, liquefied petroleum gas (LPG) ships, LNG ships, and ultra-large container ships. China has a large number of shipbuilding professionals and has accumulated rich experience in shipbuilding and has become the world’s second largest shipbuilding country. China also has a large number of highly qualified seafarers, but these seafarers are currently working on the foreign ship owners.

It is suggested that the government increase investment in the shipbuilding industry and give policy and financial support to the shipbuilding industry. Actively encourage iron and steel companies to cooperate with shipping companies and establish a community of interests. Steel companies and shipping companies jointly invest in the construction of specialized ships to jointly resist risks.

3.2 Integrate Domestic Iron and Steel Enterprises

Stimulated by the rapid growth of market demand, a large number of domestic small and medium-sized steel enterprises have developed rapidly, with low-level capacity expansion and surplus. China should strictly control the production capacity of new iron and steel, encourage cross-regional group restructuring, increase industrial concentration, and form large enterprises with international competitiveness.

It is necessary to further standardize the trade order of imported iron ore and encourage iron and steel enterprises to sign long-term transportation contracts with shipping companies that have a better reputation to stabilize freight rates when shipping fees are appropriate.

3.3 for foreign operations

It is recommended to strengthen cooperation with Brazil's Vale. Unlike the two extensions in Australia, due to the long distance traveled by iron ore, the cost of landing has always been the “soft underbelly” of Brazil’s Vale’s competition. For this reason, Vale has been working hard to change this disadvantage. In addition to cooperating with Chinese enterprises in the construction of a large-scale transport fleet, Zhuhai and Anyang have also established joint ventures for the construction of pelletized smelters. It is the only company in the country that has substantial investment in China.

It is recommended to actively participate in tariff derivatives trading. The fluctuations in freight rates brought opportunities to the derivatives market. Various funds were attracted by the volatility of freight rates, and they all participated in freight derivatives trading. According to data from the Shanghai Shipping Exchange, only about 20 companies in China participated in tariff trading in 2007, the vast majority of which were steel companies and a few were shipping companies. In the event of large fluctuations in freight rates, freight derivatives provide shippers and shipping companies with the opportunity to dynamically manage the risk of freight price fluctuations.

4 Conclusion

In the current situation where iron ore supply and mine monopoly cannot be changed in the short term, the decline in shipping costs will have a positive effect on China's steel companies. Only by truly establishing its maritime advantages, can domestic steel companies have greater profit margins in controlling the cost of iron ore.