2017 REVIEW: Chinese mill margins divide iron ore grades

The price spread between higher and lower grades of iron ore continued to widen in 2017, mainly as a result of Chinese’s steelmakers’ growing profit margins.

Prices for benchmark 62% Fe iron ore experienced a lot of fluctuation throughout the year, rising to a high of nearly $100 per tonne cfr China and falling to a low of just above $50 per tonne cfr. While this was happening, premiums for 65% Fe materials and discounts for 58% Fe products continued to grow.

January-February
Metal Bulletin’s 62% Fe Iron Ore Index (MB62%) started the year at $77.91 per tonne cfr, before it surged to a 2.5-year high of $94.86 per tonne cfr on February 21.

The relative discount for 58% Fe materials (58% discount) grew as well, although the relative premium for 65% Fe products (65% premium) went from above 15% to below that.

The general price increases were fueled by robust restocking activity among mills and traders for seaborne cargoes to be used during and after the Chinese New Year, which was late January, as well as to meet the peak spring demand for steel over March and April.

Forming the bulk of the trades were 62% Fe brands such as Pilbara Blend fines, Newman fines and Brazilian Blend fines. There was little liquidity in the 58% Fe segment.

Fortescue Metals Group (FMG), a major supplier of lower-grade products, increased its downward price adjustment for its 56.7% Fe Super Special fines to 18% for single-month bookings in January-February, and 20% for bookings made for two successive months, from 15.5% in December.

March-June
The MB62% started to retreat in March and tumbled all the way to a one-year low of $53.36 per tonne cfr on June 13.

This was amid worsening liquidity for seaborne iron ore, as most market participants were drawing down the stockpiles they had built up earlier in the year due to iron ore not getting as much support from strong steel prices and profits as had been expected.

East China’s rebar prices experienced a correction of about 500 yuan ($76) per tonne in March-April, but went on to rise over the next month to reach 3,750-3,790 yuan per tonne on May 22 – at the time, the highest in over four years.

In contrast with the general price decline in the iron ore market, the 65% premium rose above 30% in mid-June, which indicates a healthier supply-demand balance compared with the mainstream 62% segment.

On the other hand, the 58% discount, which widened to nearly 40% in April, started narrowing after that to track the weakening MB62%.

June-August

The benchmark MB62% rebounded and increased by almost 50% during the June-August period to nearly $80 per tonne cfr.

This was in line with an uptrend in steel prices. East China’s rebar prices advanced from around 3,400 yuan per tonne late in June to above 4,000 yuan per tonne for the most of August – the highest in over five years, at the time.

Domestic coke prices also experienced increases, totaling 660 yuan per tonne, from late June until early September.

Stronger steel margins and higher fuel costs had continued to encourage a preference among mills for higher grade iron ore.

The 58% discount, having dipped below 30% in July, started to increase again in August toward 40%.

The 65% premium also returned above 30% late in August following, having retreated to just above 20% in July.

September-October

The MB62% went through a second period of weakness this year in the months of September and October. It went from $78.91 per tonne cfr on August 31 to $58.52 per tonne cfr on October 31 – a 25.8% drop.

Steel prices also tumbled during these two months despite them typically being a peak season for construction activities. Rebar prices in east China went from 4,150-4,200 yuan per tonne on September 4 to 3,880-3,920 yuan per tonne on October 31.

Production restrictions to cut emissions for the winter heating season in north China partially kicked off in October. These affected sintering and pellet-making operations, construction activities in key steelmaking cities including Tangshan, as well as blast furnace production in Wu’an and Anyang cities.

These weighed on demand for rebar, as well as that for iron ore fines, especially those of lower grades with mills seeking to maximize whatever capacity they have been permitted to utilize.

The 58% discount climbed steadily above 40% from October 12 onward, while the 65% premium also surged to an all-time high of almost 43% on October 11 before declining slightly later in the month.

During this time, FMG widened the price adjustment for October shipments of its Super Special fines to an all-time high of 40%.

November-December
Iron ore prices experienced their third uptrend for 2017 in the final two months, with the MB62% marching from below $60 per tonne cfr at the start of November to $76.36 per tonne cfr on December 22.

Although the general consumption rate was lower, with blast furnace shutdowns being officially started in Tangshan and several other cities on November 15, surging steel prices and restocking demand in preparation for the Chinese New Year in mid-February and for the lifting of the winter heating season’s production restrictions in mid-March have buoyed iron ore.

East China’s rebar prices soared to almost 5,000 yuan per tonne early in December, before retreating later.

The 58% discount continued to rise toward 45%, while the 65% premium narrowed from around 35% to below 20%.

The preference for higher grades will likely persist as long as mills are making good profits, market participants said.