Iron Ore
Prices Lift as Delayed Winter Production Cuts Boost Demand
November 2018
In the short term we expect the Chinese government will act to support the economy against impacts of the trade dispute with the US. AME expects global iron ore demand to grow by 4.1% and 1.3% in 2018 and 2019 respectively. Global iron ore supply is expected to grow by 2.2% in 2018 and outpace demand at 2.4% growth in 2019.

The iron ore spot price (CFR China, 62% Fe fines) is forecast to be lower in the December Quarter of 2018, down from US$67/t in the September Quarter. Despite growth in Chinese steel production, pig iron production growth is expected to be slower due to increasing use of scrap. Going into the December Quarter, medium and low grade fines prices are expected to be suppressed by winter production restrictions in China.

The iron ore spot price averaged US$72/t in October, up 5.5% from September. The implementation of steel production cuts in China were delayed to mid-October, as the provinces were slow in releasing details of their plan, leading to high steel production in early October. Average daily crude steel production for key Chinese steel enterprises in the first 10 days in October were at similar levels to late September, but fell by 2% in mid-October. Higher than expected steel production in October, despite a seasonally lacklustre period for steel demand, has improved iron ore demand for the month but tightening steel margins led to greater preference for cheaper ores such as medium to low grade fines.

The lump and pellet premium fell 1.5% and 6.6% month on month respectively in October. Falling premiums were due to lower steel margins in China. As winter production cuts commence, lower iron ore demand will still drive a moderate downward correction in lump and pellet premiums. Previous spikes in these premiums were supported by Chinese steelmakers seeking alternatives in ferrous feed as sintering operations were generally the main focus of the cuts. Winter steel production cuts typically target blast furnaces and would lead to an overall decline in iron ore demand.

The discount between the 62% Fe and 58% Fe iron ore price was at 23% in October, from 25% in September. Meanwhile, the premium for 65% Fe over 62% Fe was down to 34%, from 37% in September. Shrinking price spreads were due to tightening steel margins and increased higher grade supply in the market. Going forward, demand for high grade product is expected to remain strong while the low grade discount is expected to persist at high levels as Chinese steelmakers seek to improve productivity amid higher steel prices and low steel inventories, while also keeping emissions in check.