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More than 1 million tonnes per month of iron ore is being sold into Europe on a spot basis as mills switch from buying ore using long-term contracts, traders told Steel First.
Major European steel mills including ThyssenKrupp, SSI and Tata Steel have all increased the percentage of iron ore they are buying on the spot market over the past year in a bid to take advantage of falling prices, sources told Steel First on Friday March 20.
Iron ore prices have more than halved since the beginning of 2014, dropping from more than $130 per tonne cfr China in January 2014 to under $55 per tonne in the third week of March 2015.
“We have seen quite a shift in customer requirements in 2015, leading to a propensity for spot cargoes to Europe, mainly on open account,” Roddy Mann, md of UK-based trading company Alfa Commodities said.
“In previous years, the majors co-ordinated 90-95% of their production via long-term contracts. The spot market has become the dominant factor in all areas of demand,” Mann added.
“We have noticed a big rise in [spot cargoes into Europe],” an iron ore trader at a major international trading house said. “It’s a buyer’s market and is likely to stay that way for the foreseeable future.”
Tata Steel alone is taking four or five spot cargoes of iron ore a month, sources said.
Miners in Canada, Latin America and Africa are responsible for the bulk of iron ore consumed by European steelmakers, with major suppliers Vale and Kumba accounting for large volumes of ore bought into the continent.
As steelmakers in Europe rethink their purchasing patterns, many junior producers closer to home succumbed to the dual pressures of increasing competition and tumbling prices.
Earlier this month, Swedish miner Dannemora went into administration, citing a build-up of inventory as its customers were "evaluating alternative suppliers".
Mills buy higher grade iron ore to comply with European emissions directives.
When iron ore prices were high, locking in prices with suppliers in full-year, half-year or quarterly contracts ensured supply quality and gave mills control over costs. But with iron ore prices in freefall, mills stand to make significant gains by fixing a larger proportion of their purchases on spot prices.
Since the beginning of 2015 alone, spot iron ore prices have fallen by more than 20%, driven by a slowdown in Chinese steel demand and a glut of supply in the market.
As the volumes of iron ore being traded into Europe on a spot basis increase, sellers and purchasers are beginning to question whether pricing spot cargoes on a cfr China basis represents best value for material to which significantly different variables in freight and logistics will apply.
“The difficulty of pricing material in Europe is that there is no published index, but, as a guide, end-users in Europe will demand [an] $8-12 per tonne discount to the equivalent [benchmark price] in China. There can be quite a spread between buyers,” Mann said.
European steel mills are buying an increasing number of iron ore cargoes on a spot basis amid the deepest price rout in a decade.