STEEL
Charging the Premium
October 2017
In this article we will explore the implications of China’s supply side reforms on ferrous raw material procurement and how their influence on the iron ore price spread will help the largest companies expand market share.

Chinese steelmakers have broken away from seasonal trends and continue to increase production, culminating in three successive monthly production records. Despite record margins, steelmakers have also been experiencing increased volatility in raw material prices. The spread between high and low grade iron ore has been diverging since Q4 of 2016. 

 

Iron Ore Grade Implications for Steelmakers 

Steelmakers, particularly those in China are currently enjoying some of their strongest margins in years. Strong Chinese domestic demand for steel, a result of Chinese government infrastructure stimulus and a resilient property market are both helping to raise hot rolled coil and rebar prices to levels not seen in six years. Despite strong margins steelmakers are also having to deal with increased volatility in raw material prices. Spot premium hard coking coal prices averaged US$196/t in August, and the spread in price between 58% Fe and 62% Fe fines has continued to diverge since the December quarter of 2016 as seen in the figure below. 58% Fe fines are selling at a discount of approximately 25% against the 62% Fe North China CFR benchmark. Over the past few months inventories of lower grade iron ores have been steadily climbing, total iron ore stocks at ports totalled 140Mt in July 2017. Despite the discount on lower grade iron ore the demand for higher grade iron ores (+62%Fe) continues to climb. AME believes this could also be an indicator of a shift in procurement practises for steelmakers. 

 

 

 

The grade of iron ore fed to a blast furnace has several implications for steelmakers, and some will be impacted more than others depending on the size of their blast furnace(s), geographic location, availability and accessibility to raw materials, and local regulations. Charging iron ore which contains more iron means that more hot metal will be produced per cubic metre of blast furnace inner working volume, this translates to an increase in productivity and allows a steelmaker to produce more product without investing in additional equipment. In contrast, lower grade iron ores will increase the coke rate and slag rate per tonne of hot metal. Steelmakers utilise lower grade ore to weather periods of low margins and/or reduced demand, with the intention of decreasing their raw material costs and blast furnace output. 


Iron ore grade also affects the emissions of a plant in numerous ways. Higher grade iron ore will release less emissions on a per tonne of hot metal basis, combining high grade ores and coking coal is a simple way for a plant to reduce sinter plant, coke plant, and blast furnace emissions (these include particulate emissions, COx’s, SOx’s and NOx’s), a parameter which is becoming increasingly more important, especially as Winter Pollution Action Plan production cuts approach. 

 

 

AME’s EVO model estimates reductant rates per tonne of hot metal, for a specified furnace size the change in coke rate per tonne of iron ore for a range of grades can be estimated. For every 1% increase in the grade of Fe contained within the iron ore fed to a blast furnace, the reductant rate per tonne of iron ore is reduced by up to 2%. This has two benefits, the amount of coke required is reduced, and more room is freed up in the blast furnace for iron bearing feed, leading to an increase in productivity and hot metal output. AME models operating costs on a site by site basis, using our in-house expertise we predict burden blends, and feed origins, by analysing Fe and deleterious element feed grade we then calculate a coke and a slag rate. 


The Top 10 

The Chinese government has stated that they want to consolidate steelmaking capacity in the country with an aim to have the top 10 steel producers accounting for 60% of capacity by 2025. Across the country plants and blast furnaces are being shutdown and replaced with larger blast furnaces in capacity swaps. These larger furnaces will be more efficient on a cost per tonne of hot metal basis, increasing the competitiveness over the smaller mills. Large blast furnaces will generally require a higher grade iron ore feed and this too will continue to drive demand for higher iron ore grades. 


For smaller mills, dealing with the environmental restrictions can be difficult when less capital is available to invest in plant environmental upgrades. Large steelmakers in China have demonstrated they have enough purchasing power to not baulk at the spread in iron ore prices. Combine this with increased coking coal prices and it becomes clear that the Chinese industry will accelerate its consolidation as smaller mills become increasingly less profitable and productive, especially in times of thin margins. This fact could also push larger steel producers to alter their procurement practices to ensure they continue to purchase higher grade iron ores and continue to increase their profitability over their smaller counterparts. 


In an industry exposed to increasingly volatile raw material costs, the importance of decreasing operating costs through efficiency and productivity improvements is a priority to any iron and steelmaker that wants to remain competitive. AME believes that the iron ore price spread will continue to be supported in the short to medium term by the largest Chinese companies, who will use higher grade material to distance themselves from marginal producers and will ensure that they qualify for Government exemptions as top tier producers.