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China wants more high-grade iron ore
June 14, 2018
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LAUNCESTON: There may be a slight problem with the prevailing theme for the iron ore market this year, namely that China is increasingly interested in using higher-grade ore as part of efforts to boost output and lower per unit pollution.

While Chinese steel mills may well be seeking to boost the use of high-grade iron ore fines and pellets, this isn’t exactly showing up in the import numbers.

The overall figure for Chinese iron ore imports is one of stability, with customs data released on June 8 showing 447.5 million tonnes arriving in the first five months of the year, up a scant 0.7 per cent from the same period last year.

The breakdown of the data is somewhat trickier, given that the Chinese government hasn’t released the detailed country-by-country numbers for April, and hasn’t provided a reason for withholding the numbers.

However, vessel-tracking and port data compiled by Thomson Reuters Supply Chain and Commodity Forecasts, which has a strong correlation with the official numbers, indicates that China is still taking large quantities of medium- and low-grade iron ore.

In the first five months of the year 289.3 million tonnes of Australian iron ore arrived at Chinese ports, according to the data.

The vast majority of Australian ore is 62 per cent iron content, such as that mined by top producer Rio Tinto, or the lower 58 per cent, as produced by the country’s third-ranked miner Fortescue Metals Group.

Very little of Australia’s output is the high-grade 65 per cent iron ore fines, or high-grade pellets.

But Australia appears to have increased its share of China’s seaborne iron ore imports so far this year, with the vessel-tracking data showing a 4.9 per cent gain from the first five months of 2017.

Brazil, which is the main supplier of higher-grade iron ore, hasn’t been able to increase its share of China’s seaborne iron ore market, according to the shipping data.

China imported 83.1 million tonnes from Brazil in the first five months of the year, down fractionally from the 83.5 million for the same period in 2017.

The Brazilian situation is somewhat complicated by the distribution centre run in Malaysia by Vale, but the shipping data doesn’t show any major spike from the Southeast Asian nation, with China’s imports rising 800,000 tonnes to 8.9 million in the January-May period.

One high-grade iron ore producer that has seen a significant increase of its shipments to China, at least in percentage terms, is Peru. China’s imports in the first five months jumped 19.4 per cent.

However, this is off a small base and China’s imports from the South American producer totalled only 8 million tonnes in the first five months of 2018.

Another producer of high-grade iron ore is South Africa, which is the third-biggest supplier to China.

However, China’s imports from South Africa were largely steady in the first five months of the year at 15.4 million tonnes, down from 15.7 million in the same period last year.

It’s likely that while China’s steel mills are wanting to use higher-grade iron ore, the problem is in sourcing additional supplies.

Much of the new iron ore brought to market in recent years has been of medium or low quality.

This has resulted in the price for higher grade ore outperforming in recent months, with Argus Media assessing 65 per cent ore in China at $88.55 a tonne on Tuesday, a premium of $22.90 a tonne to the 62 per cent grade.

This means the price of higher-grade ore is currently 35 per cent above the medium-grade, which is a substantial widening from the 19 per cent premium that prevailed at the end of last year.

The discount for low-grade ore with 58 per cent iron content to medium-grade has also widened, going from 27 per cent at the end of 2016 to 45 per cent by the end of 2017.

Currently, it is 42 per cent, according to Metal Bulletin’s assessment of 62 per cent ore at $67.23 a tonne on Tuesday and 58 per cent ore at $39.29.

Overall, the current pricing in the market suggests that supplies of higher-grade iron ore remain tight, but low-grade cargoes are still finding buyers, and the discount has settled into a new range.

Iron ore prices rose on Tuesday, supported by strength in Chinese steel markets. According to Metal Bulletin, the spot price for benchmark 62 per cent fines rose 0.7 per cent to $67.23 a tonne, largely reversing much of the 1 per cent decline seen a day earlier.

As seen in the chart below, the benchmark has been stuck in a narrow trading band for much of the past three months.

Lower grade ores outperformed during the session with 58 per cent fines adding 1.2 per cent to $39.29 a tonne. In contrast, higher grades lagged with 65 per cent fines dipping 0.2 per cent to $88.20 a tonne.

The mixed performance followed renewed buying in Chinese spot and steel futures on Tuesday.

According to Reuters, China’s top steelmaking companies — Baoshan Iron & Steel and Wuhan Iron and Steel — said they will increase prices of some hot-rolled coil, beam and steel wire products for July delivery.

That followed a separate announcement on Monday from Jiangsu Shagang Group, China’s largest privately-owned steel mill by production capacity, that it would lift spot rebar and some wire products prices for June 11-20 delivery.

The news helped to boost spot steel prices, something that flowed through to futures markets during the session.

Rebar futures on the Shanghai Futures Exchange closed Tuesday’s day session at 3,856 yuan, well above Monday’s night session close of 3,811 yuan a tonne.

It was the highest close for the October 2018 contract since December last year.

The strength in rebar futures helped to reverse earlier losses for iron ore futures in Dalian which finished trade at 473.5 yuan, up marginally from the 470.5 yuan level it closed on Monday evening.

However, as seen in the scoreboard below, futures put in a mixed performance in overnight trade with rebar futures holding onto earlier gains while iron ore contracts succumbed to profit-taking.

Trade in Chinese commodity futures will resume at 11am AEST.

From a longer-term perspective, Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, says higher iron ore grades are likely to remain supported in the period ahead, especially should steel prices remain elevated.


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