Iron Ore
Higher grade fines weather China steel production cuts
December 2017
The iron ore spot price (CFR China, 62% Fe fines) rebounded in November after two consecutive monthly falls lifting 4.3% month on month to average US$64/t. The impact of the 2+26 Chinese cities winter production cut that commenced in mid-November was less severe than previously expected as production loss are partially compensated by improving utilisation rates at steel mills in regions not subject to the cuts. Chinese steelmakers that previously kept low inventories returned to the market for restocking as steel prices lift and margins improved.

Medium and high grade fines prices recovered despite the winter steel production cuts, which did not restrict sintering operations as they did in October. In addition, Chinese steelmakers are increasingly favouring medium to high grade fines to improve productivity as steel margins are healthy. Nevertheless, sintering operations will be impacted due the lower feed requirement as a result of reduced steel production.

Given the flexibility of utilising more sinter in the burden blend, demand for lump has fallen as Chinese steelmakers deemed the lump premium too high amid continuing high coking coal prices. Lump premium spiked to over 40c/dmtu in September when sintering cuts were gradually introduced by various Chinese local governments. A build-up of lump stockpiles was also seen at Chinese ports putting further downward pressure on the lump premium which averaged 19c/dmtu in November. In comparison, the Chinese pellet premium fell to around US$50/t in late November. Despite the correction from a record high of around US$60/t in early November, demand for pellets is expected to be more resilient given its high value-in-use to improve efficiency and productivity in the ironmaking process.

The recovery of higher and medium grade fines prices remains at risk from the introduction of additional restrictions by Chinese local governments when weather conditions worsen. These restrictions are irregular and are in addition to the overall winter production cut. In late November, The Tangshan government implemented restriction on sintering operation from 25 November to 28 November, as air pollution intensified.

In November, the price spread between the 62% Fe and 58% Fe iron ore price widened to 65% from 71% in October. Chinese steelmakers continue to shy away from lower grade products to ensure productivity and support control on emissions.