The multiple significances of consolidation in the steel industry

The price of iron ore under the 'combined punch'

On August 23, the Canadian Mining Network published an article by Reuters columnist Clyde Russell, stating that since hitting a record high on May 12 this year, iron ore prices have begun to plummet, having fallen by 32.1% to 44% to date. In the past month, the value of iron ore has dropped by about 1/4.

Previously, iron ore prices soared. Clyde Russell analyzed the reasons: 'The record growth indeed has fundamental driving factors, which are the insufficient production operations in major iron ore exporting countries like Australia and Brazil due to the pandemic, leading to limited supply, while demand from China remains strong.' Analysis indicates that 'China's infrastructure and real estate sectors account for 20-25% and 25-30% of steel demand, respectively. Coupled with manufacturing demand, China has purchased nearly 70% of the world's seaborne iron ore.' This 'manufacturing demand' essentially means that China acts as the 'world's factory,' producing various products needed by countries using mineral products, including iron ore.

According to assessments by the commodity price reporting agency Argus, in just seven weeks from March 23 to May 12 this year, the spot price of iron ore shipped to North China surged by 51%, reaching a record high of $235.55 per ton. For such a surge, even Argus lamented: although the subsequent drop in spot prices by 44% to a recent low of $131.80 per ton may be unreasonable from a fundamental perspective, the earlier surge was far greater than what the market fundamentals considered a bubble.

Media reports indicate that iron ore prices have recently rebounded. According to Fastmarkets MB data, on August 24, the benchmark 62% iron ore powder imported to northern China changed hands at $146.13 per ton, up 7.3% from the previous day's closing price. In Dalian, the iron ore contract for January 2022, which had hit a seven-and-a-half-month low on August 20, rebounded by 6.2% to 817.50 yuan per ton. Singapore futures rebounded by as much as 10%.

Accordingly, analysts from CRU Group speculate that after the slowdown in credit and economic growth in July, China may take 'further stimulus measures' for the economy, such as relaxing restrictions on crude steel production.

In fact, this is entirely a subjective speculation.

According to data from the China Iron and Steel Association, in late July, key statistics showed that the daily crude steel output of major steel enterprises was 2.1065 million tons, a decrease of 3.97% from early July and a year-on-year decline of 3.03%. This is the first time this year that it has fallen below the level of the same period last year. It may further decline in August; a report from Xinhua on August 16 stated that the average daily output in early August was only 2.04 million tons. Meanwhile, iron ore imports hit a new low.

The latest data from the World Steel Association shows that in July 2021, the world crude steel production of 64 countries was 161.7 million tons, a year-on-year increase of 3.3%. China's crude steel production in July fell to its lowest level since April 2020, with a production of 86.8 million tons, down 7.6% from June and down 8.4% year-on-year.

We know that in China, the steel industry is a basic industry. To meet the huge demand for steel and other materials for our country's modernization and its role as the 'world's factory,' we must ensure a moderate scale of the steel industry. However, it should also be noted that the steel industry used to have a very low concentration, and crude steel production was 'blooming everywhere,' with a significant proportion belonging to excess capacity. Producing this crude steel not only consumes a large amount of iron ore (or scrap steel) but also causes environmental pollution. In fact, relevant departments have long been aware of this issue, but after several rounds of rectification, the results have been unsatisfactory. The root cause, in addition to some localities not fully understanding the new development concept and promoting the transformation and upgrading of the mining industry, is also due to institutional constraints and the pressures of economic development and employment.

For China, the iron ore issue is not merely a price issue; behind it lies the scale of the steel industry, the quality of its development, and whether it can establish a modern mining industry that is green, safe, harmonious, intelligent, and efficient. Of course, it also involves whether the 'dual carbon' goals can be achieved. Therefore, solving the iron ore issue is essentially about addressing the root cause and subsequently resolving the issues of the steel industry and even the entire mining industry chain. To tackle this 'long-standing difficult problem,' especially to prevent excessive fluctuations in iron ore prices, several necessary conditions must be met: one is resource integration to improve the concentration of the steel industry; another is to limit production, mainly crude steel production; and another is to reduce imports and increase the self-sufficiency rate of iron ore, including the utilization of scrap steel.

The multiple significance of steel industry integration

On August 20, a conference on the restructuring of Ansteel Group and Benxi Steel Group was held, officially launching the Anben restructuring. According to the agreement, the Liaoning Provincial State-owned Assets Supervision and Administration Commission will transfer 51% of its shares in Benxi Steel Group to Ansteel Group free of charge. In other words, after this free transfer is completed, Ansteel Group will hold 51% of Benxi Steel Group's shares, making Benxi Steel Group a controlled subsidiary of Ansteel Group. This means that, following 'Baowu,' another major 'steel giant' has emerged under the leading participation of the central enterprise Ansteel.

Industry experts believe that Ansteel has a complete product range including ordinary steel, special steel, stainless steel, and vanadium-titanium, achieving the best profit level in history in 2020, with total profits exceeding 20 billion yuan in the first half of 2021, and a sales profit margin reaching twice the industry average, with a debt-to-asset ratio lower than that of central enterprises and the industry average, and an international rating of investment grade. Benxi Steel is the largest provincial state-owned enterprise in Liaoning, rich in mineral resources, with top-notch process equipment, possessing the world's widest hot strip mill and world-class cold rolling production lines, with a crude steel capacity of 20 million tons.

On the other hand, Ansteel's main production base in Liaoning is adjacent to Benxi Steel, with similar resource endowments, production line configurations, and product structures, leading to serious disorderly competition between the two enterprises for a long time, with 'involution' lowering the competitiveness of both enterprises.

In response to this situation, Liaoning Province has long intended to transform this pillar industry into a 'steel aircraft carrier' in Northeast China, forming a pattern of 'Baowu in the south, Ansteel in the north,' thereby further enhancing the industry's discourse power and dominance.

The industry generally views this integration positively. Ansteel Group Chairman Tan Chengxu stated that after the implementation of the restructuring, they will fully leverage each other's strategic, resource, R&D, procurement, sales, logistics, and other synergistic effects, accelerate the unified capacity layout, avoid redundant investment construction, effectively promote technological equipment upgrades and product structure optimization, enhance the concentration of the steel industry, optimize the layout and structure of the steel industry, maintain the safety and stability of the steel industry's industrial chain and supply chain, and promote the high-quality development of the steel industry.

It is reported that after the restructuring, Ansteel will become the third-largest steel enterprise in the world, second only to China Baowu and ArcelorMittal. Ansteel stated that the 'new Ansteel' will aim for a development strategy of '7531' (70 million tons of crude steel, 50 million tons of iron concentrate, 300 billion-level operating income, and 10 billion-level profit), further consolidating and enhancing the advantages of the entire industry chain, smoothing the bottlenecks in dual-circulation development, becoming a 'ballast stone' for ensuring the safety of national strategic resources, and building Ansteel into a globally competitive world-class enterprise, while making Benxi Steel a highly competitive production base for automotive steel and special steel bars and wires.

The significance goes beyond this.

As we all know, the steel industry is the foundation of the national industry, and iron ore is the main raw material for the steel industry. Currently, China's dependence on imported iron ore has reached over 80%, which is a soft spot and risk point for the development of China's steel industry. For a period of time, due to the need for large imports, iron ore has become a 'trump card' for foreign mining giants to charge exorbitant prices to Chinese companies.

According to reports, after years of operation, Ansteel Group Mining Company has iron ore resources in Liaoning and Sichuan in China, as well as in Karara, Australia, with a scale of 8.8 billion tons. It is the steel enterprise in China with the most resource advantages and has strong international trade capabilities for iron ore. The company has a stripping production capacity of 280 million tons per year and a mineral processing capacity of 65 million tons per year; the overseas Karara iron ore base has an annual production capacity of 8 million tons. Benxi Steel Group also has iron ore resource reserves of 1.05 billion tons, with a production capacity of 25 million tons of iron ore, 8 million tons of iron concentrate, and 2 million tons of pellet ore per year.

Thus, the restructuring of the two major steel enterprises is undoubtedly significant for reducing dependence on foreign iron ore, and relevant experts have expressed high affirmation. Liu Jie, an academician of the Chinese Academy of Engineering, stated that after the restructuring, by leveraging Ansteel's relatively advanced mining and selection technology advantages and mining construction capabilities, it can effectively reduce the dependence on imported iron ore. Li Xinchuan, vice president of the China Iron and Steel Industry Association and secretary of the party committee and chief engineer of the Metallurgical Industry Planning and Research Institute, stated that the iron ore resources in the Anshan-Benxi region are abundant, and in the future, the two will unify planning in resource exploration and mining construction, which will further increase iron ore production and domestic self-sufficiency, allowing domestic iron ore resources to truly play the role of a 'ballast'. Wang Guoqing, director of the Lange Steel Research Center, also stated that after the Anshan-Benxi restructuring, there will be nearly 10 billion tons of iron ore resource reserves, and through overall planning and technological complementarity, it will accelerate the development pace of domestic iron ore resources and help enhance the security capability of domestic iron ore resources.

There are deeper strategic considerations.

In October 2020, the International Energy Agency (IEA) released the "World Energy Technology Outlook 2020 - Steel Technology Roadmap", which predicts in the baseline scenario (STEPS) that by 2050, global steel demand will increase by 40% from 1.85 billion tons in 2019 to 2.55 billion tons; while in the sustainable development scenario (SDS), to achieve the 2.0°C temperature control target of the Paris Agreement, global steel demand can only increase by 10% by 2050, reaching 2.03 billion tons; the total direct carbon emissions of the global steel industry must be reduced by 55% compared to 2019 by 2050, so the carbon emission intensity of steel production must be reduced by 60% by 2050, meaning that carbon emissions per ton of steel must drop from the current 1.4 tons to 0.6 tons.

The mining consulting firm Wood Mackenzie also pointed out in its latest baseline report that "currently, 7% of global carbon dioxide emissions are caused by steel. If we are to achieve the 2°C target consistent with the Paris Climate Agreement, the industry needs to prioritize decarbonization. This is an extremely challenging goal. The road to a 2°C world is fraught with difficulties, and the steel industry needs to find the right balance between growing demand and decarbonization pressure." To limit global warming to within 2°C, carbon emissions from the steel industry must be reduced by 75% from current levels, which means that global steel emissions will decrease from 3 billion tons of CO2 equivalent in 2020 to 780 million tons of CO2 equivalent by 2050.

Wood Mackenzie also introduced five measures that the steel industry needs to take to achieve the 2°C target: doubling the use of scrap in steelmaking; tripling the production of direct reduced iron (DRI); reducing the global average electric arc furnace (EAF) emission intensity by 70%; reducing the blast furnace-basic oxygen furnace (BF-BOF) emission intensity by 30%, approaching its theoretical minimum; capturing and storing 45% of residual carbon emissions (about 500 million tons per year).

In fact, to achieve the goals set by the Paris Agreement, the international steel industry and enterprises have successively set their own schedules: the European Steel Association proposed to reduce carbon emissions from the European steel industry by 30% by 2030 compared to 2018, and by 80%-95% by 2050 compared to 1990. The Japan Iron and Steel Federation proposed to achieve zero greenhouse gas emissions in the ironmaking process by 2050, reducing carbon emissions by 30%, and achieving 'zero carbon steel' production by 2100. The South Korean steel industry proposed to reduce carbon emissions from the initial 135.7 million tons to 127.1 million tons by 2030.

China is a major carbon emitter globally, and steel is one of the main carbon-emitting industries. According to the Global Carbon Project, in 2019, the total CO2 emissions related to energy and cement globally were about 3.64 billion tons, with China accounting for 1.017 billion tons, about 28%, exceeding the combined total of the US, Europe, and Japan. According to data from the Ministry of Ecology and Environment, in 2018, the emissions of particulate matter, sulfur dioxide, and nitrogen oxides from China's steel industry were approximately 1.636 million tons, 683,000 tons, and 929,000 tons, respectively, ranking first among all industrial sectors; carbon emissions were only lower than the power industry, ranking second.

In the face of carbon reduction pressure in the steel industry, the restructuring of steel enterprises is conducive to the unification of carbon reduction measures, accelerating the progress of enterprises' monitoring and rectification of carbon emissions, and helping to achieve the national goals of 'carbon neutrality and carbon peak'. Therefore, since 2019, China's steel industry has accelerated a new round of merger and restructuring. In June 2019, China's largest steel enterprise, China Baowu, implemented a restructuring of Maanshan Steel Group. In August 2020, China Baowu carried out a joint restructuring with Taiyuan Iron and Steel, and completed its acquisition of Chongqing Iron and Steel by the end of 2020. In July of this year, China Baowu and Shandong Steel Group confirmed their restructuring. Along with the restructuring of Ansteel and Benxi Steel, the pace of restructuring between central enterprises and local state-owned enterprises has significantly accelerated, effectively increasing the concentration of the steel industry.

According to the Ministry of Industry and Information Technology's "Guiding Opinions on Promoting High-Quality Development of the Steel Industry", by 2025, the concentration of the top 10 steel enterprises should reach 60%. After Ansteel's restructuring of Benxi Steel, the concentration of the steel industry in Liaoning will reach 70%, and the concentration in the Northeast region will reach 50%, which will facilitate the rapid achievement of the concentration target in the region.

Experts predict that during the '14th Five-Year Plan' period, the concentration of steel enterprises will reach a new level, which will better drive the upgrading of the steel industry and institutional innovation in steel enterprises, cultivate a healthier and more orderly market system, and better leverage the advantages of state-owned steel enterprises to provide strong support for carbon reduction, carbon peak, and carbon neutrality in China's steel industry.

Thus, it is not difficult to understand why China wants to reduce its dependence on foreign iron ore and why it wants to limit the disorderly growth of steel production, especially crude steel.