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The optimism stems from expectations that restocking demand will support prices for iron ore after the holidays, with the tight restrictions on steelmaking operations in northern Chinese cities such as Tangshan in the run up to the holidays expected to support prices of steel products.
Market participants have flagged tighter steelmaking restrictions since late September compared with last year as the reason for their “mildly bullish” outlook.
The tighter restrictions are a result of China marking the 70th year of its foundation this October and market participants had anticipated that the government would take extra care to ensure blue skies in Beijing, which is close to the steelmaking hub of Tangshan, when the country celebrates a landmark moment in its history.
One steel mill source said that the restrictions were not just limited to steelmaking but were also expected to curb transportation of raw materials during the seven-day holiday, which would further tighten domestic supply of iron ore.
“Restrictions from October 1 to November 15 in major steelmaking cities in north China also looked stricter than in the previous two years, although measures during the winter heating season between November 15 and March 15 might be similar to last year,” a source at a Tangshan-based mill told Fastmarkets.
Disruptions to blast furnace operations could lead steelmakers to chase hot metal yield in the unaffected blast furnaces, which would result in wider spreads between the mid and high-grade materials after the holiday.
High-grade fines, mainly Iron Ore Carajas, are also priced competitively at the moment and, hence, made economic sense as an input feed, market participants added.
The spread between Fastmarkets’ 65% and 62% Fe iron ore indices averaged $6.61 per tonne in September, while the traded spread between October contracts of 65% and 62% Fe derivatives on the Singapore Exchange was above $8 per tonne last week.
The contango of the 65/62% spreads shows market expectations for mill margins to improve in the coming months, sources said.
A significant widening is not expected amid availability of seaborne iron ore concentrate materials, however, which are priced at discounts and can partly replace 65% Fe fines, sources added.
Some market participants also expressed concern over downside risks generally for steel and iron ore prices starting later in October, with downstream steel demand likely to cool down toward the low season of the year.