Iron Ore
Price correction after demand expectation realigned
April 2018
Structural changes in the Chinese steel industry which include higher proportion of EAF steelmaking as well as increase scrap utilisation in BOF steelmaking have started to impact iron ore demand as recent policies have promoted the prospect of EAF development.

As a result, we have revised down our iron ore demand growth forecast from an initial 3% and 1.7% for 2018 and 2019 to 1.6% and 1.3% respectively.

The iron ore spot price averaged US$74/t in the March Quarter of 2018, up 14% quarter on quarter. Prices in the March Quarter were higher than previously forecast as the impact of winter production cut was less severe than expected. In addition, anticipation of demand rebound after mid-April on lifting of the winter steel production cuts fuelled speculation and kept prices high for January and February despite reduced demand, although prices for lower value in use supply continue to suffer.

High iron ore prices in January and February did not flow into March. The iron ore spot price averaged US$70/t in March, down 9% from February. Prices tumbled from a high US$80/t to below US$65/t in late March as the main steel producing cities Tangshan and Handan announced that winter steel production cuts would extend from April to November, although at a lower rate. In addition, the outlook is further exacerbated by slow construction restarts, concerns on tightening credit and increasing port stockpiles. Chinese port stockpiles lifted 11% quarter on quarter.

The lump premium averaged 19c/dmtu in March, largely stable from February. Lower coking coal prices, which make lump use more economical, supported the lump premium. The Chinese pellet premium lifted 3% from February to average US$45/t. The lump and pellet premiums are expected to remain well supported by Chinese government policies to control emission. In particular, production restrictions on blast furnace operation means steelmakers will favour higher value in use products to increase productivity.

The discount between the 62% Fe and 58% Fe iron ore prices lifted slightly to around 30% in March, from 29% in February. Despite a temporary relief in the March Quarter from the December 2017 low, we expect demand for lower grade iron ore to remain suppressed due to production controls in China, substitution risk from EAF producers that are ramping up production and new supply of higher grade ore as major iron ore projects ramp up.