Iron Ore
Market subdued as steel production cut draws near
November 2017
The iron ore spot price (CFR China, 62% Fe fines) declined for the second consecutive month, falling by 13.6% month on month to average US$61/t.

Prices were impacted by a slowdown in fines demand, as several Chinese provincial governments introduced sintering cuts in October to ensure acceptable air quality. In addition, the impending 50% cut in steel production for the 2+26 Chinese cities from November 2017 to March 2018 has resulted in a pullback from Chinese steelmakers in iron ore restocking.

While demand for fines is subdued, demand for high value-in-use product such as pellets has improved. Given the sintering restriction, Chinese steelmakers are increasing the proportion of pellet as ferrous feed in the burden blend, lifting productivity and capturing the steel margin that is still relatively healthy. As a result, Chinese pellet premium lifted over 10% month on month and 65% year on year, reaching over US$55/t by the end of October.

In comparison, the Chinese spot lump premium has fallen approximately 33% month on month to around 20c/dmtu, mainly reflecting the correction from the earlier spike above 40c/dmtu. Nevertheless, AME expects Chinese lump premium to hold going into November and December, supported by seasonal demand in winter. 

Steel production is expected to decline in November and December as the capacity cuts take effect in Beijing and Tianjin as well as the selected cities in Hebei, Shanxi, Shandong and Henan provinces. In addition, the Luoyang have voluntarily opted to adopt production cut measures to ease pollution, mandating a 50% production cut from 15 November 2016 to 15 March 2017. We expect production loss from the environmental measures are likely to be partially compensated by improving utilisation rates at steel mills in regions not subject to the cuts. However, this will be at the mercy of spontaneous enforcement of emergency environmental measures if weather conditions worsens.

In October, the price spread between the 62% Fe and 58% Fe iron ore price was relatively similar at around 71%. Chinese steelmakers continue to shy away from lower grade products due to sintering cuts and stronger emphasis on emissions. We expect the price spread to persist at the current level for the remainder of the year as production cut in China sets in during the winter season.