3 reasons why demand for high-grade iron ore in China is likely to remain limited

At least three reasons have been identified by market participants as the key factors constraining demand for high-grade iron ore concentrate and pellet in China - in turn, prompting premium levels to narrow

Ever since Russia’s unprovoked invasion of Ukraine on February 24, supplies of high-grade iron ore materials, such as iron ore concentrate and pellet have tightened, with strong demand from European mills lending support to higher prices for cargoes heading in that direction.

In the first two weeks of March, for instance, low-sulfur 65% Fe Ukrainian iron ore concentrate bound for Europe was being transacted at a premium of around $12 per tonne over a 65% Fe index, according to a buyer source from northern China.

Cargoes of Australian concentrate bound for China, however, have maintained a premium of around $6-7 per tonne since mid-March, although sources believe that the continued depressed demand outlook in China might prompt these premium levels to narrow.

The differential between Fastmarkets’ iron ore 66% Fe concentrate index and Fastmarkets’ iron ore 65% Fe Brazilian fines index surged to a record high of $15.05 per tonne in mid-March, amid concerns of supply shortages due to the war in Ukraine, as shown in the chart below. But the differential has narrowed significantly since then and was $8.57 per tonne as of Friday, May 6, mainly due to the depressed demand outlook in China.

In addition, the high-grade iron ore pellet premium in Europe was also heard to have crossed the $80 per tonne mark over a 65% Fe index, putting it more than $20 per tonne above Vale’s second-quarter blast furnace pellet premium of $60.60 per tonne over Fastmarkets’ index for iron ore 65% Fe Brazil-origin fines, cfr Qingdao. But the buyer source from northern China said the opposite could be said to be true for China-bound cargoes.

Fastmarkets’ index for iron ore pellet premium over 65% Fe fines, cfr China tracks the spot premium that high-grade iron ore pellet can achieve over Fastmarkets’ 65% Fe fines index on a cfr China basis. The pellet premium index averaged $56.36 per tonne in April, down $2.82 per tonne, or 4.8%, from $59.18 per tonne in March, as shown in the graph below.

Demand for high-grade materials in China, however, is unlikely to be as boisterous compared with Europe and, below, we look at the three most likely reasons for depressed demand in China and why that might prompt premium levels to narrow.

1. Sintering restrictions lifted

Market participants believe that the lifting of sintering restrictions is likely to be one of the main drivers for the limited demand for both iron ore concentrate and pellet in China.

“There was not much benefit for mills to be consuming seaborne high-grade materials such as iron ore concentrate and pellet when there really was no need for them. Most mills have not had any sintering restrictions imposed on them since early March,” a Xiamen-based analyst said.

Demand for such high-grade material is usually seasonal and will typically pick up during the winter season from November to February, the analyst added.

2. Mill focus on keeping production costs low

Several steelmakers were said to have increased their consumption ratios in favor of low-grade fines - such as Super Special fines, Fortescue Blended fines and Indian fines - and have been blending it with Iron Ore Carajas fines, according to a Shanghai-based analyst.

The supported demand for high-grade Iron Ore Carajas fines also explains why the 65-62% fines indices differential has been steady, in contrast to the narrowing premiums for concentrate and pellet, according to Jane Fan, index manager at Fastmarkets.

The differential between Fastmarkets iron ore 65% Fe fines index and 62% Fe fines index has been steady at $24-25 per tonne since March, Fan said - as shown in the graph below.

“Chinese demand for seaborne iron ore concentrate and pellet has been very limited. Most steel mills were trying to keep [production] costs low, so some have also turned to procuring domestic iron ore concentrate and pellet instead because these raw materials are cheaper and immediately available,” Fan added.

Fastmarkets’ index for iron ore 66% Fe concentrate, cfr Qingdao averaged $187.24 per tonne in April, down $4.57 per tonne or 2.4% from $191.81 per tonne in March.

Chinese port inventories of iron ore concentrate have remained at around 10.9 million tonnes for both March and April, because there were just fewer cargoes arriving in China, a Hong Kong-based trader told Fastmarkets.

Port inventories of iron ore pellet, meanwhile, averaged around 4.9 million tonnes in March, before increasing by 6.1% to 5.2 million tonnes in April, the trader said.

“Some Indian iron ore pellet cargoes were heard to be flowing into Europe at very high prices when the war broke out [in] Ukraine in late February. But European mills [began] to reject the high prices for most of the second-tier pellets from India and were being stringent about the specifications [of imports], so the flow of Indian pellets started to revert to China instead, thus prompting the slight inventory increase between March-April,” he added.

In addition, the trader said, the increase in iron ore pellet inventories at the Chinese ports might have suggested that demand for seaborne cargoes was limited because mills were likely to be procuring cheaper domestic alternatives.

Fastmarkets’ index for iron ore 65% Fe blast furnace pellet, cfr Qingdao averaged at $231.84 per tonne in April, down $7.01 per tonne, or 2.9%, from $238.85 per tonne in March. It was $217.86 per tonne on May 6, up $1.10 from $216.76 per tonne on April 29.

3. Limited demand for steel products amid major city lockdowns

Several major cities in China have been subject to lockdowns because of the country’s “zero tolerance” policy on Covid-19, which has led to the halting of several construction projects which have indirectly depressed demand for steel and iron ore, the Shanghai-based analyst said.

And the northern China buyer source said: “The Chinese government previously [said that it was] exploring easing the restrictions imposed on logistics and at building sites and that [announcement] actually lifted market sentiment. But the actual situation on the ground proved otherwise - because of the stringent checks on workers and raw materials transport.”

The Xiamen-based analyst added that overall market sentiment has turned bearish because of more Covid-19 cases emerging in several cities including Beijing and Shanghai, which has continued to prompt provincial governments to impose city-wide or community-wide lockdowns.

“It is still very difficult for steelmakers to make any short- or long-term projections about demand for steel products and raw materials,” the analyst added.

A Singapore-based trader said the recent announcement by the Chinese authorities that mills must keep crude steel production below 2021 levels has also further depressed the demand outlook for raw materials and fueled more bearish sentiment.

And the reduced demand for steel products has led to a fall in steel prices and this has affected steelmaker margins, which is the reason they have resorted to keeping steel production rates low and are only buying raw materials on an ‘as-needed’ basis, the Singapore-based trader said.

In the current situation, it is difficult to ascertain whether mills will go all-in to produce more steel to make up for lost time and production because Covid-19 cases are still emerging. So most are likely to continue to keep steel output limited and maintain low production costs until the government gives the ‘all clear’ signal
Singapore-based trader

In summary, premium levels for high-grade iron ore concentrate and pellet are likely to narrow further if demand from China remains limited. The consumption of these high-grade raw materials is only likely to improve when steelmakers start to see the positive margins that might encourage a switch from their current focus on cost savings to high-quality production.

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