Iron Ore
Prices Gain for High Value-In-Use Product
September 2017
The iron ore spot price (CFR China, 62% Fe fines) continued its upwards momentum in August, increasing 13.5% month on month to average US$76/t. This was supported by improving steel prices and decent margins driven by optimistic economic data for construction and infrastructure development, government policies, and rising coking coal prices.

Rising coking coal prices have once again caused supply tightness in medium to high grade iron ore products, as Chinese steelmakers seek high value-in-use products to reduce fuel cost. Coking coal prices have lifted by around 50% since June 2017, on the back of restricted Chinese domestic production and continued supply disruptions in Australia.

In early August, the Chinese government introduced the 2017-2018 Beijing, Tianjin and Hebei Winter Air Pollution Plan, aiming to improve air quality during the winter season. Targets include lowering the particulate matter (PM2.5) levels by 25% for Beijing, Tianjin and Hebei. To achieve this, the Chinese government mandated a production cut of 50% in steel from installed capcacity from November 2017 to March 2018. Chinese steel producers have brought forward steel production following the drastic government mandated environmental restrictions over winter. 

Steel production is expected to decline in the December Quarter as the measures take effect. Nevertheless, the downside risk remains minimal as steel demand remains robust supported by construction and infrastructure development. Any production loss from the environmental measures are likely to be compensated by improving utilisation rates at steel mills in regions not subject to the cuts.

Given the impact of coking coal prices and environmental policies, Chinese steelmakers continue to shun lower grade products. In August, the price spread between the 62% Fe and 58% Fe iron ore price indeces reversed its earlier improvement, and widened to around 73%. In comparison, the Chinese pellet and lump premium in late August lifted 6.6% and 25% month on month respectively. Contrary to what happened in the March Quarter, the lump premium is holding strong despite high coking coal prices. This is due to an anticipated sintering cut as the government rolls out environmental policies.