Iron Ore Pains For Chinese Industries

The rising price of iron ore in the world has caused pain in many branches within China, and many companies need to find ways to increase their efficiency in production to save themselves.

The price of steel will follow.

Since the price of iron ore in international markets is expected to increase by to at minimum 65% by the year 2008, imports of iron ore to China are now up in the amount of RMB 236/ton (RMB: USD = 7:1) in average, compared to 2007’s level. With the addition of a rise in shipping costs, the raw materials used in steelmaking have increased by RMB 400/ton, which is equivalent to an increase of 15% per cent.

Jigang Group, a large steel firm owned by the state in Jinan, an eastern coastal city of Jinan, is able to import more than 60 per cent of the iron it mines in Brazil and Australia. “In just three short months the steel price in the country is being adjusted upwards for three times, amounting to RMB 1000, which is an increase of 20,” said Mr Bo Tao, the director of the production at Jigang, “In fact, the scale of the steel price increases has far surpassed the amount of raw material price increases.”

“In March, the average Chinese steel price increased to RMB 5570/ton, an increase of 40% over the previous comparable timeframes, and the rise is likely to continue. In a way, the steel price rise is an amplified result of the iron ore increasing,” said an anonymous source who was from Jigang, “The strong market demand for steel in China has provided steelmakers with the ability to bargain. On price determination.”

The industries that depend on the downstream affected

“We do not have much bargaining power before steel companies,” said Mr Gao Zengdong, a top manager of Sinotruk, one of the largest heavy-duty truck makers located in China, “Due to production demands, we need to purchase lots of heavy and large plates. To ensure that raw materials are available, however, it is not possible to bargain the price.” It is known that Sinotruk purchases more than 20,000 tonnes of heavy, medium and large plates directly from Jigang directly.

“The cost for medium and heavy plates was RMB 4800/ton a year ago. However, it has now been reduced to RMB 6300 now,” Gao said. Gao. Even though Sinotruk has long-term supply agreements with Jigang however, Jigang’s price isn’t fixed. Since the beginning of January, steel firms have been raising rates every couple of weeks, and the price range is RMB 200-300/ton for every increase. “Not the entire range of steel products be used to meet our specifications, and due to transportation costs, we must accept the products of Jigang in the vicinity. Jigang.”

Mr Gao also used a different example of pig iron as an important component of axles. The price of pig iron has gone up to RMB 2600/ton in the year 2006 to today’s RMB 5000. Particularly since the beginning of this year, the cost of pig iron has been increasing nearly daily. To manage the high price of the cast, the casting businesses must absorb 60 per cent of the increase and then pass the remainder on to their customers.

“Casting parts manufacturers are under immense tension,” said Mr Zhang Libo, secretary-general of the China Foundry Association. On one the one hand, casting companies must bear the costs of pass-on raw materials from steel manufacturers. However, the high competition in the market is forcing many to take on the burden by reducing their profits margins. This has led to the fact that numerous small casting businesses have had to shut down.

In another downstream sector in another downstream industry, Mr Liu Wei, a supply manager at Jinan Diesel Engine (JDEC), is also suffering. In the month of February, JDEC’s raw materials, including structural steel as well steel plate and all carbon steel, have all been at least 30% costly. JDEC invested RMB 600 million on the procurement of raw materials this year, including RMB 500 million on steel products. The ever-stretching profit margin has had a negative impact on the development of JDEC, according to Mr Liu.

The shipbuilding industry is an important user for steel products from China, and ship plate cost has risen by over RMB 1000 over the past few months. “Shipbuilders in China are now able to fulfil delivery orders up to 2012, and every million tons of capacity for ships consumes 40 tons of steel-related products. This means it’s not possible for steel consumption to drop. In fact, a few less capitalised shipbuilding firms are closing down due to the fact that they cannot afford the costs of production anymore,” said Mr Bo from Jigang.

Internal solutions

After numerous price hikes, Chinese steel companies have generally recouped their iron ore costs. However, their downstream customers are mostly located in extremely competitive markets market segments, or those that are consumer-oriented can be difficult to pass on the cost increases. After a half-year-long campaign, white goods manufacturers in China have increased the prices of their products to fight the rising cost of steel. Automakers with steel costs accounting for 70% of their cost base are also openly expressing their frustration.

“Our industrial trucking sector is highly competitive, and it’s difficult to transfer the costs,” said Mr Gao from Sinotruk. Steel is the major component in 90 per cent of the primary materials utilized in the production of trucks. But since many state-owned trucks producers are expanding their capacities to compete for their share of the local and internationally-based markets, these companies cannot directly transfer the costs to their clients. However, they can count on technological advances and energy efficiency and emissions control to limit the costs of production as much as feasible.

The same issue of cost is equally affecting the highly electronic home industry, which is competitive in China.

Mr Wang Zhenggang, who is Vice-CEO at Haier Group, admitted that “for an industry that is competitive downstream like us we must be able to digest the higher costs through technological advancements, product differentiations, premium quality and high-value products. For instance, we recently introduced a premium home electronics kit that is high efficiency and eco-friendly features.”

Mr Wang added that because of the increasing cost of steel, many companies are creating new materials for substitutes, “In addition, we also use an international procurement system which source all the necessary raw materials and accessories from the countries with the lowest cost.”