In the first quarter of 2014, China’s steel industry suffered a total loss of 2.3 billion yuan, with major steel producers losing as much as 4.1 billion yuan, according to Wang Xiaoqi, vice president of the China Iron and Steel Industry Association. This significant financial hit has pushed the industry into what many describe as a "severe winter," with numerous steel mills expected to exit the market in the coming years.
The downturn in the steel sector has had a direct impact on companies like Yuxi Hongshan Pellet Industry and Trade, which specializes in processing iron ore pellets. Their sales radius has shrunk dramatically, with some operations now limited to just a short distance from their facilities. Meanwhile, Yuxi Xianfu Iron & Steel (Group) Co., Ltd. is facing its own challenges, particularly in securing affordable raw materials. The competition for iron ore has become a critical factor in their long-term sustainability.
Xianfu Iron & Steel, located in Xinping County, claims to have access to half of Yunnan’s iron ore reserves. However, over 60% of this resource is currently outsourced, leading to increased costs. The company sees potential savings in self-sufficiency, but the current market dynamics make it difficult to realize these benefits.
According to Yang Jiasheng, a representative from the China Metallurgical and Mining Enterprises Association, iron ore prices are expected to continue declining in 2014. Despite this, the steel industry is still struggling to see meaningful price reductions due to ongoing supply constraints. Many industry experts believe that domestic supply will remain insufficient, forcing an increase in imports—especially of high-quality ore.
Since early 2013, iron ore spot prices have dropped sharply, falling by 30% by April 2014. The decline has put pressure on both large and small mining operations, with some reaching cost levels not seen since 2009. In Qingdao port, 62% iron ore fines from India fell to 700 yuan per ton, matching the lowest price recorded in November 2009.
Qian Hongzhu, director of the marketing department at Hongshan Pellets, noted that 700 yuan per ton is often considered the floor for iron ore prices. Historically, the market tends to rebound when prices approach this level. However, recent data from major ports suggest a possible upward trend, offering cautious optimism for the future.
Currently, Hongshan Pellets sells its product at over 1,000 yuan per ton, with pricing based on a 60% grade. Processing costs exceed 200 yuan per ton, leaving only a narrow profit margin. In contrast, during 2007 and 2008, pellet prices reached over 1,300 yuan per ton, allowing the company to expand its market reach, even paying more than 140 yuan per ton in freight costs to serve markets like Panzhihua in Sichuan.
The drop in steel prices has also affected the entire value chain. Qian explained that while steel prices have fallen significantly—from over 6,000 yuan per ton to around 3,500 yuan today—the cost of raw materials has not decreased proportionally. This mismatch has created a challenging environment where production costs remain high, yet selling prices are low.
To adapt, Hongshan Pellets has begun shifting its focus back to the Yuxi region. By optimizing transportation routes, such as sending pellets to Qujing and returning with coke, or to the Red River and bringing back cement, the company has managed to reduce costs.
Both Qian and Li, a deputy general manager at Xianfu Iron & Steel, agree that the two companies are closely linked. Xianfu Steel relies heavily on Hongshan Pellets for its supply, sourcing hundreds of thousands of tons annually from the company. With an annual production capacity of about 800,000 tons, Hongshan Pellets plays a key role in supporting local steel production.
Xinping County is home to one of Yunnan’s most significant iron ore deposits, with proven reserves exceeding 500 million tons. The Lukuishan and Dahongshan mining areas are particularly rich, with the latter holding over 470 million tons. Despite this, very little of the ore is processed locally, with most being transported via pipelines to Kunming Steel.
While the Dahongshan mine is a major supplier, its direct economic impact on Xinping County is minimal. Local authorities attempt to retain some ore concentrate within the region, but the amount is usually less than 100,000 tons annually. In comparison, the Lukuishan area, which supplies Xianfu Steel, has seen a reduction in output over the years.
Xianfu Steel’s annual production capacity is 2 million tons, but only about 1 million tons of raw ore is sourced locally. Most of this comes from the Dahongshan area, which is operated by different companies. Despite having access to local resources, the company still needs to import over 60% of its iron ore, including from distant sources like Brazil and Panzhihua.
Having local mines is crucial for the survival of steel plants, as highlighted by Li. He emphasized that owning nearby mines allows companies to maintain stability in a volatile market. However, state-owned enterprises like Kunming Steel have already secured the best deposits, leaving smaller players like Xianfu Steel to rely on a mix of local and imported ores.
The cost of transporting iron ore within Yunnan is significantly higher than in coastal regions, with freight costs adding over 100 yuan per ton. For example, Xianfu Steel once purchased 300,000 tons of Brazilian ore at 65% grade, with transport costs reaching 280 yuan per ton.
Despite these challenges, local mines still offer better profit margins. Li pointed out that the ideal ore grade for smelting is around 50%, but Yunnan’s iron ore is generally lower in quality. This forces the use of higher-grade ores to compensate, increasing overall costs.
The steel market in Yunnan remains sluggish, with prices continuing to fall. In 2013, domestic steel prices dropped by 8.5% year-on-year, and in March 2014, the PMI index for the steel industry rose slightly but remained below the 50-point threshold, indicating weak demand.
Li noted that rebar prices should ideally be around 4,000 yuan per ton to ensure profitability, but current prices are approaching cost levels. In the Kunming market, rebar prices have been below 3,800 yuan for extended periods.
In addition to rising ore prices, the cost of coke in Yunnan is among the highest in the country, exceeding 400 yuan per ton. This is partly due to the long distances involved in transportation and the use of secondary coke, which has a lower fixed carbon content compared to other regions.
With an original production capacity of 2 million tons, Xianfu Steel now produces less than 1 million tons annually. The broader Yunnan steel industry has an approved capacity of 30 million tons, but actual production is below 20 million. Li believes the industry has moved beyond relying on volume and is now focused on cost control.
To manage expenses, Xianfu Steel has implemented energy-saving measures, such as using blast furnace gas for power generation. This accounts for over 30% of the company’s electricity needs. Other top steel producers in Yunnan, like Chuxiong Desheng Steel, have adopted similar strategies to remain competitive in a challenging market.
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