Can liberalizing scrap imports and reducing crude steel production shake up ore prices?

From the perspective of inventory cycle combined with upstream and downstream analysis, iron ore is in the stage from passive destocking to active replenishment of inventory, market sentiment is generally optimistic, the price is easy to rise but not fall.The market will not be short - term because of crude steel output reduction expectations and scrap imports and easy to change.

During the New Year's day, a total of two pieces of news attracted the attention of the black market: one is a number of ministries and commissions jointly issued the "Notice on the Standardization of the Import Management of Renewable Iron and Steel Raw Materials", which clearly meets the national standards of renewable steel raw materials, does not belong to solid waste, can be freely imported;Another is that on December 29 last year, Xiao Yaqing, Minister of the Ministry of Industry and Information Technology, said at the National Conference on Industry and Information Technology in 2021 that low-carbon industrial actions and green manufacturing projects would be implemented around the target node of carbon peak and carbon neutral.The iron and steel industry, as a highly energy-intensive industry, should resolutely compress crude steel output to ensure that crude steel output is down year on year.

On the face of it, both are bad news for charges, which have been strong recently, especially for iron ore.Logically, the decline of domestic crude steel production in 2021 will lead to a decrease in domestic consumption of iron ore, while liberalizing the import of scrap steel will theoretically increase the proportion of iron element in crude steel production of scrap steel, form substitution for iron ore and suppress the ore price.However, from the post-holiday market performance, prices are still dominated by bulls.The author believes that in the short term, freeing the import of scrap steel and reducing the crude steel output have little effect on restraining the rise of ore prices.

First, the rise in iron ore prices is due to a number of factors, including global quantitative easing and the weakness of the US dollar index, which led to a general rally in international commodities, and the rapid transfer of profits to the mines as domestic steel production capacity grew faster than iron ore production.From the point of view of the asset allocation of top-down, iron ore, "international pricing, the downstream demand, low social inventory" varieties situation led to it as a margin of safety strong assets are cash, and according to the analysis of the inventory cycle perspective combined with upstream and downstream iron ore is from passive to active to inventory fill inventory stage, market sentiment is generally optimistic, the price down to higher difficulty.None of the above factors will be easily changed by the Ministry of Industry and Information Technology's expectation of reducing crude steel production and freeing up scrap imports.

Second, iron ore's pricing model makes it insensitive to both messages.The spot pricing of iron ore is mainly based on the forward index monthly average price and the port spot quotation, and the current main contract in the futures market is the 2105 contract. The author believes that, in the upward trend of the price, the target of reducing the crude steel output has a neutral impact on the iron ore price, or even plays a promoting role.In the past, we believed that the price of iron ore was not only positively correlated with the price of steel, but also positively correlated with the profit of steel mills to a certain extent. This is also the industry experience of most steel mill raw material purchasing and iron ore trading practitioners.However, in recent years, the correlation between mine price and surface profit has decreased significantly, and this correlation began to decline in 2017.This was related to the continuous accumulation of iron ore port inventory at that time, and the elasticity of the price was suppressed. At that time, the lumber was removing "ground strip steel", and there was a large gap between supply and demand, and the market gave a higher profit for long process steelmaking, resulting in the reduction of correlation.As the mining traders experienced a round of market clearing in 2018, the iron ore inventory cycle shifted from active destocking to passive destocking. The performance of prices in the strong cycle stage exceeded market expectations, reflecting that the price operation logic dominated by cycle fluctuations is not easy to be captured by the public.Integrated the tracking and analysis of iron ore inventory cycle, while iron ore inventory cycle is weak from strong cycle to cycle, but given the upstream and downstream concentration differences and the present situation of supply and demand of disk pricing targets, may and September's price expectations is optimistic, if the steel industry security administration to yield to become useful in demand season again structural mismatch between supply and demand, ore price also rise some resonance may occur.

Finally, the release of scrap imports on the impact of mine prices can be described as "far hydrolyze can not quench the near thirst".On the one hand, the domestic iron and steel production capacity is mainly in the long process blast furnace, and the supply of scrap to iron element is only supplement, on the other hand, scrap itself is in a tight balance pattern.According to the import data of scrap steel in the past 16 years, the largest importers of scrap steel in China are the United States and Japan, accounting for about 60%.Recently, Japanese steel scrap and domestic upside down 350 yuan/ton, it is difficult to import a large number of steel scrap before the Spring Festival, and in the long run, even if there is a 10 million to 20 million tons of steel scrap import, temporarily can not change the domestic supply and demand pattern of steel scrap, but may be like 2009, the overseas steel scrap price to buy up, open the resonance rise of raw material prices.

In the long run, to promote the steel industry concentration, reduce the iron ore external dependence, and attention to the recycling of renewable resources to solve high ore price brings to the domestic steel industry a series of problems are significant, but for futures trading, investors also need to deal with the relationship between short-term and long-term, grasps the expected to, pay attention to reality, do a good job in risk control.