ANALYSIS: The complicated growth of the 58% Fe iron ore market

The seaborne spot iron ore market has long considered 62% Fe material its benchmark product, after a shift away from annual price negotiations in 2008.

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Grade depletion at mines producing 62% Fe material – and the recent start-up of a wave of large-scale, lower-grade iron ore projects – has shifted that dynamic.

The market for 58% Fe iron ore has now, in 2014, come to account for around 300 million tpy of an annual seaborne market that exceeds 1 billion tpy.

The ramp-up in output of this lower-grade product has come at a crunch point for miners, however.

Both major and junior producers bet on their own output costs per tonne being lower than those of their competitors, and on firm growth in Chinese demand, ensuring a stable market for the steelmaking raw material.

Supplies came on stream as predicted, but Chinese demand growth has slowed amid stagnation in the country’s domestic housing and construction sectors.

Metal Bulletin’s 62% Fe iron ore index has tumbled by more than 40% since the beginning of the year, from more than $130 per tonne to five-year lows just above $75 per tonne in early November.

Price differential
Prices for lower grades of iron ore have suffered even more, with the differential between the two prices broadening in May as price falls accelerated and 62% Fe iron ore dropped below $100 per tonne.

Prices have since fallen to less than $76 per tonne, the lowest level for five years.

The differential between the two prices widened to nearly 20% in June, from an average of less than 10% earlier in the year.

The decoupling of prices between the two major grades of iron ore has increased the exposure to basis risk held by traders, mills and miners.

In response to the increased price differential emerging in the physical market, the Singapore Exchange, a major commodity trading hub, announced plans to launch a 58% Fe iron ore swaps contract.

The exchange’s 62% Fe contract, launched more than five years ago, has now become the reference contract outside China for the world’s paper iron ore market.

Brand values
The key brand in the 58% Fe market is Anglo-Australian mining major BHP Billiton’s Yandi product, according to analysts and traders speaking to Steel First.

Produced at BHP’s Pilbara operations in Western Australia, the Yandi 58% Fe product is referred to as the benchmark for Australian lower-grade material, and is the main reference point for Metal Bulletin’s 58% Fe premium daily iron ore index.

Fellow Anglo-Australian mining major Rio Tinto produces its own 58% Fe product, mined close to BHP’s Yandi mine in the Pilbara, and called Yandicoogina.

Miners who do not use a 58% Fe index to price their lower-grade fines, apply price adjustments to average 62% Fe index prices based on percentage point differentials for iron content and other factors, including impurities and brand recognition.

Fortescue Metals Group (FMG) – another Australian miner but a relative newcomer to the market, having started mining just six years ago at its Chichester hub – is now the fourth-largest producer of iron ore in the world and its largest producer of lower-grade iron ore.

FMG is now consolidating a lot of the brands it developed early in its production cycle into one, a product called Fortescue Blend.

“Most of these lower grade [less than 60% Fe] operations are mining Channel-iron deposits [CID], which are different to the premium Brockman ore [and later Marra Mamba], which was the traditional target in the Pilbara because of its higher grade and lumpiness,” an analyst told Steel First.

“The CIDs have been a big growth area over the past decade, as they are relatively plentiful, easy and low-cost to mine, and have low impurity levels [of silica and alumina, for instance] for their grade,” he added.

“They are still referred to as DSO [direct shipping ore] but often require a bit of low-cost processing beyond the standard crush/screen/wash,” he said.

A decision based on cost-effectiveness and blast-furnace burden optimisation determines what types of iron ore steel mills choose to use.

Ramping up
Any scarcity of lower-grade iron ore in the spot market will represent a major price support for 58% Fe products in the next six months, a mill source told Steel First.

The 62% Fe market has seen close to half of its value wiped off since the beginning of the year, dropping to new lows of just above $70 per tonne on November 19.

While the price of 58% Fe iron ore has also continued to fall, it has done so at a different pace to the higher grade material.

The price differential between 58% Fe and 62% Fe material has narrowed in the past month to about $15 per tonne, considerably less than the near-$25 per tonne gap between the two grades seen in June.

A reason for the narrowing of the price gap is the relative tightness of 58% Fe supply in comparison to the 62% Fe market, sources told Steel First.

Miners, faced with tightening profit margins and tumbling prices, are being very cautious about where to spend capital and to ramp up output.

“As 58% Fe products become less cost-effective, miners will face difficulties getting finance to ramp up production, even if they want to do so,” one industry source said.

“A slowdown in growth rate for 58% Fe fines can mainly be attributed to the lower profit margins commanded by the 58% Fe market compared with those of higher-grade fines,” a trader concluded, “if production costs are relatively the same.”

Click on image for full details of the 58% Premium Index.