Iron Ore
Further Steel Production Cuts Extend Iron Ore Premiums’ Rally
August 2018
Structural changes in the Chinese steel industry, including a higher proportion of EAF steelmaking and increased scrap utilisation in BOF steelmaking have started to impact iron ore demand. As a result, AME expects slower global iron ore demand growth of 1.1% and 1.6% for 2018 and 2019 respectively.

Global iron ore supply is expected to outpace demand to grow at 1.2% in 2018 and 2.6% in 2019.

Despite growth in Chinese steel production, pig iron production growth stalled due to increasing use of scrap and stricter environmental measures but has shown signs of picking up. Nonetheless, recent signals of stimulus in the Chinese economy could provide upside for prices in the short term.

The iron ore spot price averaged US$65/t in July, down 0.9% from June. Prices rebounded in late July following the Chinese Government‘s initiatives to increase liquidity in the market to boost domestic demand and speed up infrastructure development. The stimulus acts as a counter measure to the potential for a slowdown in growth from tariffs imposed by the United States. While this could support steel demand, the stimulus is expected to be temporary and could be pulled back if trade tensions are resolved. Reducing financial risk remains the main objective for the Chinese Government.

Lump and pellet premiums soared in July, lifting around 44% and 19% respectively amid new rounds of production cuts by the Tangshan Government. In July, the Tangshan Government released new pollution reduction initiatives for SO2, NO2 and CO from July 20 to August 31. In response, each city implemented production cuts of 20-50% on steelmaking operations including sintering, shaft furnace pelletising as well as blast furnace ironmaking. Ongoing production cuts, in particular on sintering operations, will further strengthen demand for lump and pellets, and high value-in-use ferrous feed for increased productivity and emission control.

The discount between the 62% Fe and 58% Fe iron ore price was 26% in July, stable from June. Meanwhile, the premium for 65% Fe over 62% Fe widened to 41%, from 35% in June. Preference for higher grade iron ore feed persisted as Chinese steelmakers seek to improve productivity amid higher steel prices and low steel inventories, as well as keeping emissions in check. AME expects the low grade discount to persist from environmental production controls on steel continue in China, from substitution risk as EAF producers increase their share of production and as new supply of higher grade ore enters the market as major iron ore projects ramp up.