Chapter 1 Industry Overview
The iron ore industry refers to a complete set of industries that mine iron ore from the earth's crust and go through steps such as crushing, screening, and washing to make it reach industrially available standards. This industry covers the whole process from mining to transportation, to smelting and sales. It is the foundation of global manufacturing, especially the steel industry.
Different classifications and characteristics of iron ore:
- According to the types of iron-containing minerals: magnetite ore, hematite ore, false or semi-pseudo-magnetite, vanadium-titanium magnetite, limonite, siderite, and two or more of them containing iron A mixed ore composed of minerals.
- According to the content of harmful impurities: iron ore contains harmful impurities S, P, Cu, Pb, Zn, V, Ti, Co, Ni, Sn, F, As, according to the level of its content, it can be divided into high pyrite ore Stone, low sulfur iron ore, high phosphorus iron ore, low phosphorus iron ore, etc.
- According to industrial type: divided into available and temporarily unavailable iron ore. Available iron ore includes iron ore for steelmaking, iron ore for ironmaking, and iron ore to be selected. Iron ore that cannot be used in industry temporarily, that is, off-table iron ore, the iron content of ore is between the lowest industrial grade and the cut-off grade.
Figure iron ore industry chain
Source: Qianji Investment Bank iFinD
The development of the global iron ore industry is closely related to the international economic situation and steel demand. Global iron ore demand has grown substantially over the past few decades due to accelerated industrialization and urbanization in China, India and other emerging economies. In addition, global iron ore supply is also affected by weather and policy changes in major producing countries such as Brazil and Australia.
Although the global iron ore industry has faced many challenges in recent years, such as fluctuations in ore prices and tightening of environmental regulations, the industry continues to develop driven by new technologies. For example, the application of automation and digital technology is improving the production efficiency of mines. At the same time, the development of environmental protection technology is also helping the industry to develop in a more sustainable direction.
China is the world's largest iron ore consumer, and China's steel industry has a profound impact on the demand for the global iron ore market. Although China has the world's fourth largest iron ore reserves, most of its ore is of low grade and high mining costs, so China has long relied heavily on imported iron ore.
In recent years, with the transformation of China's economic structure and the tightening of environmental protection policies, China's iron ore demand structure is changing. On the one hand, China is promoting the green transformation of the steel industry, which has increased the demand for high-grade iron ore, and at the same time put forward higher environmental protection requirements for the domestic iron ore industry. On the other hand, China is actively promoting the internationalization of the iron ore industry chain to reduce dependence on external supplies, which will have a profound impact on the global iron ore market structure.
As of January 11, 2023, the number of Shanghai and Shenzhen constituent stocks in the iFinD iron ore sector is 5, which has changed slightly in recent years. The total market value of enterprises has fluctuated greatly in recent years, and the overall market value has shown a fluctuating upward trend. As of January 11, 2023, the total market value has reached 50.263 billion yuan.
The total market capitalization of the constituent stocks in the graph
Source: Qianji Investment Bank iFinD
Chapter 2 Business Model and Technology Development
2.1 Iron ore industry chain
The iron ore industry is an important upstream industry, the midstream is iron ore smelting, steel processing and manufacturing, and finished product manufacturing, and the downstream is linked to manufacturing, real estate, and infrastructure. The upstream iron ore and midstream steel industries in the entire industrial chain are affected by downstream manufacturing, real estate, and infrastructure demand. The transmission effect of the entire industrial chain is from bottom to top, and downstream demand affects steel production, which in turn affects the demand for upstream raw materials.
At present, my country's iron ore is mainly divided into two parts: import and domestic mining. my country's iron ore reserves are relatively large. However, due to the transformation and upgrading of the manufacturing industry and the tightening of ecological and environmental protection policies in recent years, the amount of iron ore mining has shrunk. In terms of iron ore, there is a greater dependence on imported iron ore from abroad. At the same time, since the demand for iron ore is mainly affected by the middle and lower reaches of the industrial chain, the bargaining power of the iron ore industry is not strong, and the domestic concentration is relatively high.
Figure monthly iron ore production and monthly imports
Source: Qianji Investment Bank iFinD
2.2 Business model
The business model of the iron ore industry mainly involves the mining, processing and sale of iron ore. First, iron ore companies need to conduct exploration activities to determine the reserves and quality of iron ore. This usually involves geological exploration and drilling activities.
Once a deposit is identified, the company proceeds with mining activities. This includes digging and transporting iron ore, often using heavy equipment and large vehicles. The iron ore then undergoes a series of processing steps including crushing, screening and washing to improve its quality to an industrially usable standard.
Figure iron ore industry research perspective
Source: Asset Information Network Qianji Investment Bank
Sales are the last link in the iron ore industry. Iron ore is mainly sold to steelmakers, who use it to make products ranging from construction steel to cars and home appliances. Sales models may include long-term contracts, spot market transactions, and short-term contracts based on market prices.
In addition, many large iron ore companies are also working on developing new mining and processing technologies to improve efficiency and reduce costs. They also need to comply with environmental regulations while working to reduce the environmental impact of mining activities.
In general, the business model of the iron ore industry needs to balance the cost of mining and processing, market demand and price, and environmental protection requirements to achieve sustainable profits and growth.
2.3 Technology Development
Technological development in the iron ore industry mainly focuses on three aspects: improving efficiency, reducing costs and reducing environmental impact. Here are a few key areas of technological development:
- Automation and robotics: Many mining companies are adopting automated equipment, such as driverless trucks and drilling rigs, to improve productivity and safety. Robotics is also being used to perform work in hazardous or inaccessible places.
- Data analysis and predictive models: By collecting and analyzing large amounts of data, mining companies can better understand the geological characteristics of mineral deposits, predict production trends, and optimize work processes. Predictive models can also help companies predict market demand and price fluctuations to better develop sales strategies.
- Environmental protection technology: Faced with increasingly stringent environmental protection regulations and social expectations, iron ore companies are developing and adopting various environmental protection technologies. This includes reducing waste emissions, improving energy efficiency, and developing new processing technologies to reduce environmental impact.
- Ore Quality Improvement: New processing technologies are being developed to improve the quality and purity of iron ore. This includes using more efficient crushing and screening equipment, and developing new methods of ore processing.
- Transparency and traceability: As society's focus on corporate social responsibility increases, mining companies are developing new technologies and systems to increase the transparency and traceability of their operations. This includes using blockchain technology to trace the provenance of ore, and establishing a more effective environmental and social impact reporting system.
Through statistics on the number of patents of various patent applicants in the domestic iron and steel industry, the rankings are: Jinling Mining, Hegang Resources, Dazhong Mining, Hainan Mining, ST Guangzhu.
Source: Asset Information Network Qianji Investment Bank
my country's iron ore industry is the foundation of the iron and steel industry and other industries. The most fundamental direction of development is to fully ascertain my country's iron ore reserves, effectively develop iron ore reserves, and at the same time ensure that the ecological load is reduced, the production process is optimized, and the highest efficiency is provided. The society provides sufficient high-quality iron ore to meet national construction and economic development.
Iron ore beneficiation technology
Facing my country's iron ore resources with many lean ore, many compound ore, and responsible ore body structures, it is of great significance to the development of my country's iron and steel industry to improve the beneficiation level and iron ore utilization rate of my country's iron ore.
The average grade of iron ore resources in my country is only about 32.67%, which is significantly lower than the world average grade. Therefore, the basic research work on iron ore resources should be strengthened to effectively grasp the internal structure, granularity, quality and other characteristics of iron ore resources. Due to the great differences in the quality of iron ore resources in my country, it is necessary to deepen the research on grinding and grading technology, adhere to the model of one case, one policy, adopt different grinding processes for different ores, and develop related new mineral processing equipment according to specific requirements. At present, the collectors used in iron ore mining are still mainly fatty acid collectors, and efforts should be made to research new collectors that meet the characteristics of iron ore in my country, so as to simplify the operation process and reduce pollutant emissions.
iron ore mining technology
Based on the principle of saving energy, reducing consumption and reducing pollution, develop safe and high-intensity mining technology for deep iron ore resources that are difficult to mine; strengthen comprehensive utilization and resource recycling, and develop iron ore open-pit to underground mining and deep mining and utilization technologies; Emerging technologies such as artificial intelligence, develop new mining technologies with a higher degree of automation, and strengthen the mining of iron ore that is difficult to mine and has a large mining depth.
2.4 Policy Supervision
Industry authorities and management system
The National Development and Reform Commission and the Ministry of Industry and Information Technology conduct macro-control on the industry. China Iron and Steel Industry Association (abbreviated as China Iron and Steel Association, State-owned Assets Supervision and Administration Commission Metallurgical Organ Service Bureau), is a national industry organization in China's iron and steel industry. Motion of the Iron Ore Working Committee of the Industry Association.
related policy
The iron ore industry is the foundation of the iron and steel industry. In order to promote the development of industry and advanced manufacturing, the iron ore industry should continue to deepen reforms, improve quality and efficiency, and contribute to the development of the national iron and steel industry. Since the 19th National Congress of the Communist Party of China, in order to promote the high-quality development of the iron ore industry and accelerate the transformation and upgrading of the industry, a series of supporting policies have been introduced from important to local levels, providing a good guarantee for the development of the iron ore industry.
Table of major national and local industry laws and regulations
Source: Asset Information Network Qianji Investment Bank
Chapter 3 Industry Valuation, Pricing Mechanism and Global Leading Enterprises
3.1 Comprehensive financial analysis and valuation methods of the industry
The comprehensive financial analysis of the iron ore industry mainly needs to consider the following steps:
1. Industry overview: Understand the basic situation of the iron ore industry, including industry scale, growth rate, major players, supply chain, policy environment, etc. An overview of the industry can help you understand the company's position in the industry and the overall competitive landscape of the industry.
2. Company Selection: Select the specific company to analyze, either a leader in the industry or an emerging challenger. The selected companies need to be representative to make your analysis more generalizable.
3. Financial statement analysis: This is the core of financial analysis. You need to read the company's financial statements in detail, including balance sheet, income statement and cash flow statement. The main analytical tools are ratio analysis (such as current ratio, leverage ratio, profitability ratio, etc.), trend analysis in financial statements, and comparative analysis with other companies in the industry.
4. Risk analysis: In addition to financial data, it is also necessary to consider the company's risk factors, such as market risk, credit risk, operational risk, etc. These risk factors may have an impact on the company's financial condition.
Figure Comprehensive Financial Analysis
Source: Qianji Investment Bank iFinD
Figure Industry Valuation and Historical Comparison
Source: Qianji Investment Bank iFinD
Figure Index PE/PB Bands
Source: Qianji Investment Bank iFinD
Chart Index Market Performance
Source: Qianji Investment Bank iFinD
5. Valuation and forecast: Based on the above analysis, the company's valuation and forecast can be made. Common valuation methods include price-earnings ratio valuation method, PEG valuation method, price-to-book ratio valuation method, price-to-current ratio, P/S market-to-sales ratio valuation method, EV enterprise value method, and EV/Sales market-to-sales ratio valuation method Method, RNAV revaluation net asset valuation method, EV/EBITDA valuation method, DDM valuation method, DCF discounted cash flow valuation method, dividend discount model, equity free cash flow discount model, unlevered free cash flow Discount model, net asset value method, economic value added discount model, adjusted present value method, NAV net asset value valuation method, book value method, liquidation value method, cost replacement method, real option, LTV/CAC (customer Lifetime value/customer acquisition cost), P/GMV, P/C (customer), Metcalfe valuation model, PEV, etc.
3.2 Industry Development and Driving Factors
In 2022, the total iron ore inventory of 45 ports and the total inventory of imported iron ore will both decrease month-on-month, the inventory of 45 ports in Australia will decrease by 60.3 tons, and the inventory of Brazilian mines will increase by 800,400 tons, and the overall inventory will be at a low level. However, the main steel mills are less willing to replenish their warehouses, and generally maintain low-volume operations, and their willingness to replenish their warehouses in major production areas is relatively low. In the future, iron ore replenishment in related aspects may drive up iron ore prices.
Figure iron ore inventory
Source: Asset Information Network Qianji Investment Bank iFinD GF Futures
technological innovation
Taking iron ore prospecting and mining as the two major aspects of technological innovation, gaining advantages in prospecting and mining through technological innovation can effectively promote the increase of proven reserves. At the same time, adopting different processing technologies for different grades of iron ore can effectively Promote the improvement of the utilization level of iron ore; through the active development of open-pit to underground, deep mine development, intelligent mining and other technologies, further promote the upgrading of mining technology, and jointly promote energy conservation and emission reduction in the iron ore mining industry, effectively promoting quality and efficiency.
Policy assistance
As the industry situation improves, the risk of new production capacity in violation of laws and regulations begins to increase. In order to strictly prohibit the addition of backward production capacity and strictly replace production capacity, the Ministry of Industry and Information Technology and the National Development and Reform Commission are formulating new implementation measures for capacity replacement in the iron ore industry and guidelines for iron ore project filing.
Local governments mainly provide policy encouragement in terms of financial subsidies, tax incentives, financial support, industry guidance, and administrative licensing support to guide the transformation and development of relevant enterprises, and at the same time promote technology research and development in related fields, and promote the improvement of quality and efficiency in the iron ore mining industry.
demand pull
With the relaxation of national epidemic prevention and control policies and economic recovery, infrastructure development, equipment manufacturing and real estate industries will all usher in an upswing period in the future. The increase in demand from related industries downstream of the industrial chain has significantly promoted the increase in demand from the upstream steel industry and iron ore industry.
event driven
Figure News Index
Source: Qianji Investment Bank iFinD
3.3 Industry risk analysis and risk management
Table common industry risk factors
Source: Asset Information Network Qianji Investment Bank
environmental risk
Environmental protection policies and standards are becoming more and more perfect and strict, and supervision and law enforcement are constantly intensifying, which raises the requirements for corporate environmental improvement. Enterprises in the iron ore industry are facing greater pressure on environmental protection, and the increase in investment in environmental protection has led to an increase in production costs. With the implementation of new environmental protection laws, stricter government supervision and law enforcement, enhanced environmental protection supervision and standards for enterprises, and enhanced environmental protection awareness of the public, the iron ore industry enterprises are facing enormous pressure on environmental protection. As the state issues ultra-low emission standards, corporate investment in environmental protection projects will increase, and environmental protection investment and operating costs will increase.
Capacity optimization and adjustment risk
As the country promotes the transformation and upgrading of traditional enterprises and optimizes the layout of production capacity, some enterprises with backward production technology and excessive pollution emissions may face greater pressure. Purchasing new and less polluting production equipment may result in large financial expenditures. At the same time, the cost of related technical personnel and maintenance costs are huge, which will cause greater financial pressure on the company.
International market price fluctuation risk
my country's iron ore relies heavily on foreign imports, especially in high-end fields. Fluctuations in iron ore prices in the international market directly affect domestic iron ore prices, thereby affecting the operating performance of related companies.
Non-performing asset risk
The credit risk of commercial banks presents new trends and characteristics. Among them, credit risk is spreading from the Yangtze River Delta to eastern provinces and cities and central and western locations, and from difficult industries such as steel, photovoltaics, and ships to upstream and downstream industries and related industrial chains. Difficulties in the disposal of non-performing assets in the iron ore industry are mainly due to the existence of enterprises in name only, and guarantees are in name only.
Difficulty in clearing non-performing assets During difficult times in the industry, a considerable number of iron ore enterprises have stagnated operations, lost financing capabilities, and dried up cash flow. It is difficult for commercial banks to reduce and strengthen non-performing assets to obtain cooperation from enterprises. Many loans have to be passively postponed and sit on the sidelines. Its deteriorating and helpless. Many guarantee companies misjudged the trend of the industry, got too involved in small and medium-sized iron ore enterprises, and were unable to fulfill their compensatory obligations. Even if the commercial bank's collection work fulfilled the legal procedures, its creditor's rights could not be effectively guaranteed.
The economic interests of commercial banks are damaged. As my country's steel industry is still in a period of deep adjustment of the industrial structure, the possibility of a comprehensive and continuous outbreak of credit risks in the entire industry in the next five years will increase. There is fear of difficulties in collecting the principal and interest of non-performing assets in the iron ore industry. In work, they are more inclined to dispose of non-performing assets in large quantities by means of write-offs, packaging and transfer of non-performing assets, etc., eating up a large amount of profits and damaging the economic interests of commercial banks.
3.4 Competition Analysis
The competitive situation in the iron ore industry is mainly determined by the following factors:
- Major Suppliers: Supply to the iron ore industry is concentrated in the hands of a few large mining companies such as Rio Tinto, BHP Billiton and Vale. These companies control most of the world's iron ore supply and therefore wield a lot of influence in the market.
- Steel demand: The main consumer of iron ore is the steel industry. Therefore, changes in global steel demand directly affect the demand and price of iron ore. In recent years, as the world's largest steel consumer, China's economic policy and development of the construction industry have had a major impact on the iron ore market.
- Market entry threshold: The market entry threshold of the iron ore industry is relatively high, requiring a large amount of capital investment for exploration, development and operation. In addition, various environmental and safety standards need to be met. Therefore, it is difficult for new competitors to enter the market.
- Alternative Materials: While there are currently no materials that can fully replace iron ore, technologies such as recycling and reusing steel scrap, as well as the development of new steel manufacturing methods, may affect iron ore demand.
- Geography: Iron ore is often produced and consumed far apart, so transport costs also play a large role in determining the competitive landscape. Iron ore producers located close to consuming markets may have a competitive advantage.
Figure SWOT analysis
Source: Qianji Investment Bank iFinD
3.5 Important participating enterprises
Major Chinese companies include Dazhong Mining [001203.SZ], Hainan Mining [601969.SH], Hegang Resources [000923.SZ], Jinling Mining [000655.SZ], ST Guangzhu [600382.SH].
Top ten companies in the global iron ore industry in 2022:
- Vale: The Brazil-based mining giant is the world's largest iron ore producer with 319.6 million tonnes of output in 2021.
- Rio Tinto: As the world's second largest mining company, it is also the world's second largest iron ore producer. The Australian company will produce 276.6 million tonnes in 2021.
- BHP Group: As the world's largest mining company and the third largest iron ore producer, BHP's iron ore production in 2021 will be 245.4 million tons.
- Fortescue Metals: The Perth, Australia-based miner ranks fourth with 184.7 million tonnes of iron ore production in 2021.
- Arcelormittal: The Luxembourg-based mining and manufacturing company ranks fifth with 51.2 million tonnes of iron ore production in 2021.
- Metalloinvest: The Russian mining and manufacturing company ranks sixth with 40.8 million tonnes of iron ore production in 2021.
- NMDC: This Indian mining company is the largest iron ore producer in India and the seventh largest in the world. The company's iron ore production in 2021 is 35 million tons.
- Companhia Sideurgica Nacional: The Brazilian mining and manufacturing company ranks eighth with 31.6 million tonnes of iron ore production in 2021.
- Kumba Iron Ore: The South African miner ranks ninth with 30.2 million tonnes of iron ore production in 2021.
- Steel Authority of India: Iron ore production of India's steel authority in 2021 is 30 million tons, ranking 11th.
Chapter 4 Future Outlook
The future development of the iron ore industry may be affected by the following main factors:
- Changes in China's demand: China is the world's largest iron ore consumer. In recent years, China's economic policies and the development of the construction industry have had a major impact on the iron ore market. However, there is a view that China's hot metal production has peaked and demand for iron ore in the country may decline in the coming years.
- Green Mining: With increased global attention to environmental issues, iron ore producers may need to focus more on reducing carbon emissions, adopting greener mining techniques and considering how to effectively rehabilitate mined sites.
- Technological advancements: In the future, new mining technologies may change the way the iron ore industry operates. For example, technologies such as automation and machine learning may play an important role in increasing production efficiency and reducing production costs. In addition, technological progress may also trigger new demand, such as the development of electric vehicles and renewable energy may have an impact on steel demand.
- Market supply: The supply of iron ore may also affect the future development of the industry. For example, the development of new mining areas, such as the Simandou project in Guinea, may increase the supply of iron ore to the market.
- Policy implications: Policy changes around the world may also affect the future development of the iron ore industry. For example, the government may implement stricter environmental protection policies, or adjust tax policies on the mining industry.
Therefore, the future development of the iron ore industry will be affected by various factors, including demand changes, environmental protection requirements, technological progress, market supply and policy influences, etc.
Cover Photo by Tobias Kleeb on Unsplash