The 65% Fe derivatives contract on the Singapore Exchange, which was launched in December 2018 and which is settled against Fastmarkets’ daily 65% Fe iron ore index, was stable last month. Traded volumes totaled 954,000 tonnes, compared with 1.54 million tonnes in May.
Rio Tinto has lowered the 2019 shipment guidance figure for its Pilbara iron ore operations in Western Australia to 320-330 million tonnes on a 100% basis, it said on June 19. This was down from an estimate of 333-343 million tonnes announced in April.
Concern about Australian supplies hung over the market throughout June, supporting a rise in the premium for Pilbara Blend fines to more than $5 per tonne late in the month.
Before Rio Tinto lowered its guidance, Vale had lowered its iron ore and pellet sales target to 307-332 million tonnes in late March, compared with the previous target of 382 million tonnes. The company realized sales of 365.60 million tonnes of iron ore and pellets in 2018.
Apart from the disruptions on the supply side, the government in China’s Tangshan province issued a production regulation plan in mid-June intended to combat air pollution. Mills which had adequate environmental production standards were required to cut production by 20% but the rest were required to reduce their output by at least 50%.
The latest figures from the China Iron & Steel Association (Cisa) show that crude steel output reached an average rate of 2.06 million tonnes per day in the first 10 days of June. This was up by 2.8% from 2 million tonnes per day in late May.
The supply issue and high production were the major factors behind a general upturn in the price of iron ore, regardless of grade.
According to Fastmarkets’ daily iron ore price assessments, the 62% Fe iron ore index averaged $110 per tonne cfr China in June, up by 10% compared with the May average of $99.93 per tonne.
Over the same period, the 65% Fe iron ore index averaged $122.34 per tonne cfr China, up by 7% compared with May’s average of $114.73 per tonne.
Fortescue Metal Group has lowered its discount for 56.7% Fe Super Special fines to 7% for July shipments, compared with 11% for June, which indicates improved acceptance of medium and lower grade fines in the Chinese market.
But with the higher 65% Fe prices, the price for pellet-making concentrates showed a different picture of widening discounts based on the 65% Fe index.
The discount Fastmarkets tracked during June was around $3-6 per tonne depending on laycan and quality.
More mills holding concentrate cargoes have been heard to engage in derivatives trading, which helped them lock in costs by hedging the 65% Fe derivatives contract or by 65/62% Fe spread trading.
Some sources expected narrowing margins for steel mills in the near future if there are no massive production cutbacks, especially because we are approaching the time of year when consumption is at its weakest.
Only if strict environmental production measures are in place and Chinese mills see improved margins will there be increased use of high-grade ores; otherwise, they will stick to their current purchasing patterns.
But we cannot rule out the possibility that if the premium for mid-grade ores continues to rise, mills will look for other cost-effective blending methods, which will mainly use high grades to blend with lower grades.