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Fastmarkets MB daily benchmark for 65% Fe fines dropped by 22% by Monday November 26 after peaking on October 29. The 62% Fe iron ore index declined by 16% over the period, as some Chinese steelmakers started to seek larger volumes of cheaper ores, which consequently supported lower Fe-grade fines prices.
The shrinking price spreads between different grades of iron ore were also reflected in the port stock volumes. The previously dropping inventories of Brazil-origin fines grew through September-October, while inventories of Australian fines have been declining since August. Among the mid-range ores from Australia, the decreased availability of cargoes provided seaborne prices with some upside support. But the demand-side support has now started to fade away. Early November estimates by the China Iron & Steel Association (CISA) suggest that blast furnace iron production will fall further and at an accelerating pace. In the meantime, even sharper cuts to finished steel production in China imply that reasons behind the reduction are more demand- rather than environment-related.
It was strong steel prices which boosted the operating margins for Chinese steel mills and the steel price rise was a major driver behind the market upturn we saw in iron ore in the first place. Increased margins prompted steel mills to optimize output while using ores with less impurities. In the third quarter of 2018, however, steel prices started to slide and we believe they are set to fall further with weakening demand from the construction sector amid winter activity. Notably, the operating margin for hot-rolled coil in November was down to a 16-month low, according to our Steel Cost Service. The narrowing of the price gaps between the 62% Fe benchmark and high-grade iron ores signals we may be at a turning point where the focus for Chinese mills is shifting from output optimization to cost effectiveness.
Along with environmental aspirations and strong steel margins amid firm demand, it was elevated coking coal prices which also incentivized mills to curtail metcoal consumption by using higher quality iron ore. Coking coal prices also slid in the second half of November, but still perform stronger than iron ore. Fastmarkets MB coking coal indices, both fob Dalrymple Bay Coal Terminal (DBCT) and cfr Jingtang, remained on the rise till the week ending Friday November 23 when both hard coking coal and premium HCC import prices in China decreased, although by less than 1% on a weekly average basis. For the remainder of the year, we believe there will be a further mounting downside risk to prices from seasonally weakened demand.