An iron ore mining site in Australia Photo: cnsphotos

Although production resumption in the post-pandemic era has greatly boosted steel demand, the high price for iron ore has further jeopardized the benefits to Chinese steel makers at the downstream. Industry insiders are calling for a change of the pricing mechanism for iron ore, which failed to thoroughly reflect actual supply and demand in the market.

In December 2020, 62 percent of the iron ore Platts index rose nearly 30 percent in a single month. As of Monday, the Platts index was $164.5 per ton, up 3.33 percent month-on-month, and more than 100 percent higher than the lowest point in 2020, media reported.

Factors such as imperfect pricing mechanisms and periodic over-speculation in futures have often pushed prices significantly away from supply and demand fundamentals on the spot market, resulting in a decline in companies' benefits, and seriously affecting the long-term sustainable development of the steel industry, according to a report that the China Iron and Steel Association (CISA) sent to the Global Times on Wednesday.

Industry experts said that the Iron ore Platts Index, a pricing mechanism that has been recognized by the major iron ore producers, often mainly reflected the voices of the four major mines and some trading enterprises, but failed to consider the interests of Chinese steelmakers.

At present, the world's top four miners - Vale, Rio Tinto, BHP Billiton and Fortescue Metals Group - account for 80 percent of the global market. The four major miners all use the Platts index as it maximizes their profits, but Chinese steel enterprises have to face soaring prices of raw materials under the Platts index, Wang noted.

"The average profit margin of Chinese steelmakers is 3-5 percent, while the profit margin for these iron ore suppliers is 60-70 percent," said Wang, noting that to tackle the problem, Platts should expand the sample scale and make the index compilation process open and transparent. 

"Chinese indexes should be involved in the price-setting process, rather than passively accepting a single pricing system," she said.

In response to the issue of the pricing mechanism of the iron ore industry, the CISA said that it supports and urges iron and steel as well as mining enterprises to make more use of spot trading platforms for transactions and adopt more mixed index prices, the report said.

Luo Tiejun, vice president of the CISA, also called for a new pricing mechanism for iron ore during a meeting in December, when he suggested that China should adopt comprehensive measures to ensure the supply of iron ore, establish a new pricing mechanism, improve futures market rules and further strengthen supervision, media reported.

In an effort to ease dependence on several major mines overseas, scrap steel was allowed to be imported starting from January 1. In addition, China will also improve the utilization rate of domestic scrap steel.

Currently, the utilization rate of scrap steel in the steel industry is about 20 percent in China, but it is expected to rise to more than 30 percent, partly easing tensions connected to iron ore, experts said.

To ensure the sustainable development of iron ore supply chains, a series of measures will be introduced for China's steel industry including optimizing and adjusting the industrial layout and speeding up mergers and acquisitions, according to a solicited guideline on promoting the high-quality development of the iron and steel industry issued by the Ministry of Industry and Information Technology.

Before a fairer mechanism is in place, the authorities need to strengthen exploitation and investment in domestic mines and form a united group among iron and steel producers via mergers and acquisitions in a bid to gain bargaining power for Chinese industry participants, Wu Wenzhang, president and founder of steel industry portal steelhome.cn, told the Global Times.