While downward pressure mounts on the steelmaking raw material markets, premiums for higher-grade iron ores have been sustained despite narrowing operating margins at Chinese steelmakers.
Chinese mills are operating with shrinking margins since the end of last year but the premium for high-grade ores remains high. Historically, the two factors tend to move in the same direction, as mills focus more on cost efficiency when they are making less money for each tonne of steel produced. Once their operating margins pick up, however, they are more inclined to purchase higher grade material to optimize their blast furnace production rate.
Since the start of this quarter, this usual pattern has been broken - supply woes provided support for 65% Fe fines prices and consequently for premiums over the 62% Fe benchmark.
Following the coronavirus pandemic, nations across the world have implemented lockdowns at an unprecedented rate and the unforeseeable nature of the pandemic is adding uncertainty about supply, not only from Brazil, but also India and Australia. Even though there may not be major shortages, miners have already reported staff having been infected and operating with fewer workers can also impact the output.
The Brazilian volumes have not yet recovered to pre-disaster levels seen before the Brumadinho tailings dam burst; any potential disruptions will therefore provide strong upside support to the premium for Brazilian fines.
In the coking coal market, the Indian lockdown on the contrary drove the prices lower - business activity at the major spot buyer has been disrupted. As a result, Australia-origin hard coking coal prices declined to the lowest levels in the market since August 2016.
Although supply woes had supported met coal prices earlier in the year, the focus has now shifted to the demand-side issues. While Indian demand has been under pressure from the nationwide lockdown, demand from another major importer, Japan, has also been weak amid production cuts implemented by mills.
And although China's business activity recovery is set to provide support for met coal demand, especially at the current attractive price levels, weak buying activity elsewhere puts pressure on prices. And in the longer run, Australia's greater reliance on China may adversely affect prices.
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