Iron Ore
Prices Face Headwind
August 2019
As a consequence of higher iron ore prices, the Chinese pellet premium fell 18% month on month to US$22/t in July, as steelmakers turn away from expensive pellet product and seek cheaper ferrous feed source to cut costs.

The lump premium was largely stable month on month at US33c/dmtu. Despite earlier support for lump premium during periods where sintering restrictions were enforced, lump premium started to decline in late July as production restriction was lifted.

The discount between the 62% Fe and 58% Fe iron ore price was largely steady. Lower grade discounts shrunk since the start of the year due to supply shortage, as well as weak steel margins supporting demand for cheaper lower grade ores. In contrast, the premium for 65% Fe over 62% Fe fell to 6% in July. This is expected to persist as China enters seasonal lull period for steel demand in August due to the weather impact. In addition, manufacturing activities will likely remain subdued as the US plans to impose an additional 10% tariff on the remaining US$300bn dollars of Chinese goods from September.

Iron ore supply tightness is expected to ease in the remaining of 2019, as Vale ramps up production and majors kept production guidance unchanged. Vale has reaffirmed its 2019 iron ore and pellet sales guidance at 307-332Mt, as sales for the first half of 2019 reached 139Mt. In addition, there are potential upsides for Vale’s production if its applications to resume dry processing production of up to 30Mtpa are fully granted. Rio Tinto’s has maintained its Pilbara shipments at 333-343Mt for 2019, as shipments from the first half reached 155Mt.

On the demand side, rainy weather in China during August and high steel inventories are expected to curb steel demand and subsequently steel production. Based on previous years’ experiences, Chinese winter steel production is likely to commence in October and will likely retain its previous targeted approach for the implementation of production curbs.

The iron ore spot price averaged US$120/t in July, up 9.8% month on month. Price reached a high US$126/t in early July, highest level seen since January 2014. Price spike was largely supported by supply disruption as a result of tailing dams’ incidents in Brazil, weather and mine plan issues in Western Australia. In addition, prices have been supported by continual resilience in Chinese steel production, which lifted 10% year on year in the first half of 2019. Nonetheless, prices face downside risk as additional supply is expected to enter the market in the remaining months of 2019. Meanwhile, persisting weak steel margins and increasing steel inventories could put a drag on iron ore prices.