Analysis of raw material prices rise and product profits

In 2021, steel mills have raised product prices, behind this continuous rise, is the increase of raw material prices such as coke and iron ore. Steel mills hope to transfer cost pressure through higher prices. However, the rise of the steel prices have a greater impact on downstream steel enterprises. The contradiction between steel mills, steel traders and downstream steel enterprises continues to intensify.

In now 2022, steel prices rise 5% compare to the same period last year. This increase seems small, in fact, last year between April and May was a period that domestic steel prices rose significantly. This year in the environment of a significant reduction in demand, the prices are still maintained at last year's high, it can not to be said the steel prices are not high.

I believe that many people are also concerned about the issue as we are. Since the beginning of this year, steel prices have risen step by step. Are steel mills and steel traders still making profits?

Let's start with a reckoning for the steel mills. In the first quarter of 2022. the iron ore spot price rose from 683 yuan/ton to 1003 yuan/ton , by an increase of 31.81%. The spot price of coke rose by 30.36%, from 2,542 yuan/ton to 3,650 yuan/ton.

Nevertheless, the increasing rate of finished steel products are much lower than that of the steel raw materials. For examples, rebar rose by 7.41%, high line rose by 6.56%, hot rolled plate rose by 10.44%, cold rolled plate rose by 4.85%, medium thick plate rose by 4.15%.

What is the result of such asymmetrical price increases? That is, gross profit per ton of steel dropped sharply.

If count with the transportation costs go up due to the increase price of oil and so much other reasons, it can be said that if the steel mills cannot continue to raise the ex-work prices, most steel mills will face a loss.

After steel mills, let's talk about steel traders. First of all, the spread of the COVID-19 caused a sharp drop in steel demand, logistics and transportation restrictions. Compare to same period last year, steel market turnover decreased by about 40%. The higher ex-work prices which were made by the steel factory lead to more difficulties for steel traders in running the business.

With the sharp rise in the price of steel raw materials, steel mills' profit margins have been compressed to a very low level, and some steel mills have even reached the edge of loss. Steel traders needless to say, since this year steel traders who can make profits are very rare.

At present, there is no winner in the steel market, three parties are lost: because of the high raw material prices, steel mills production profits are greatly reduced; Steel traders are difficult to sell the steel because of the high price of steel; Downstream users’ production costs increased because of the high steel prices.