FOCUS: Chinese iron ore buyers’ alumina sensitivity drops

Chinese steelmakers’ narrowing margins and improvements in the supply of Brazilian iron ore have resulted in lower penalties for alumina content in the steelmaking raw material recently, though there are factors that could raise buyers’ sensitivity toward this impurity in the coming months.

The main driving factor for alumina sensitivity among buyers last year was the robust steelmaking margins in China that fueled demand for low-alumina materials among mills looking to raise their productivity levels.

This sensitivity was augmented by the tight supply of low-alumina materials that Chinese buyers typically sourced from Brazil or domestic mines in China. The tightness coincided with ample Australian supply that generally has a higher alumina content, and with mills looking to manage their blends to ensure the efficient operation of their blast furnaces, the combination of factors consequently triggered further demand for low-alumina cargoes.

Fastmarkets’ MB alumina value-in-use (VIU) indicator stood at -$2.80 per tonne on January 2 last year, widening to -$7.97 per tonne on November 1.

In recent months, however, Fastmarkets’ calculations show a narrowing of the alumina penalty to -$5.84 per tonne as on January 2, 2019.

This VIU indicator measures the price impact of each percentage point of that chemistry’s deviation from the benchmark grade, all other factors being equal.

Meanwhile, the MB 62% Fe Low-Alumina Iron Ore Index, which Fastmarkets launched on August 27 last year, recorded an average premium of $5.91 per tonne compared with the MB 62% Fe Iron Ore Index in September.

This average gradually narrowed to $2.79 per tonne in December. The month-to-date average on January 23 is $1.58 per tonne.

Shrinking margins
Chinese steelmakers, especially those producing rebar, were making profits of over 1,000 yuan ($147) per tonne in the first three quarters of last year. This prompted them to maximize their production for hot metal by reducing slag rates in blast furnaces.

A way to achieve this is to lower impurities such as alumina in iron ore.

But in November, China’s steel markets slumped with the approach of the seasonal demand lull. Restrictions in the winter heating season also turned out to be lighter than expected.

The Fastmarkets MB domestic price assessment for rebar in eastern China tumbled from a high of 4,700 yuan per tonne at the end of October to around 3,700-3,800 yuan per tonne in late November. They have remained in that range since.

As a result, margins fell to less than 500 yuan per tonne for rebar producers and even under 100 yuan per tonne for those making hot-rolled coil, according to sources.

Mills have now returned to prioritizing the cost effectiveness of their raw materials over production efficiencies in an environment of narrowing margins, end user sources said. They no longer care about slag rates as much as they did last year and are thus less sensitive toward alumina content.

This has resulted in a greater uptake of lower-grade Australian cargoes and a narrower price gap between mid-grade Australian iron ore and Brazilian materials.

“The alumina value-in-use will become less noticeable in due time amid the sluggish profit margins of Chinese mills. Buying cheap alternatives is the next best option,” a mill source in northern China told Fastmarkets.

Chinese buyers have turned their attention away from 62% Fe Brazilian fines and shifted it to low-alumina alternatives like 57% Fe Yandi fines, and even to brands with lower Fe and higher alumina content such as Jimblebar fines and Super Special fines, sources said.

In September, Yandi fines sold against 62% Fe indices carried discounts of around $7 per tonne, but since October, the discount has narrowed to $2-3 per tonne. Discounts for index-linked cargoes of Jimblebar fines have also narrowed to $6-7 per tonne since November, from around $9-10 per tonne in September-October.

The improved reception of lower-grade iron ore is also demonstrated by Fortescue Metals Group narrowing the downward price adjustments for February shipments of its 56.5% Fe Super Special fines and 58.2% Fe Fortescue Blend fines to 33% and 22% respectively based on a 62% Fe index, according to sources. The adjustments for January shipments of the products were 37% and 28% respectively.

The narrowing of the price gap between Australia iron ore and Brazilian materials is expected to rekindle the uptake of the latter.

“The uptake of any brand is a function of cost efficiencies or productivity advantage it brings to the blast furnace operations among other factors. As the gap between Australian brands and Brazilian mid-grade materials like Brazilian Blend fines narrow, mills will shift their focus back toward the latter due to their better overall quality,” a trader source said.

More low-alumina supply
Brazil, the biggest supplier of seaborne low-alumina iron ore, exported 184.34 million tonnes of the steelmaking raw material in the first half of 2018, largely unchanged from a year earlier, according to the country’s foreign trade ministry, MDIC.

But in the second half of last year, shipments totaled 205.47 million tonnes – up 2.5% on the year and 11.5% higher than those made in the first half.

The higher supply of low-alumina materials from Brazil ended up undermining their pricing strength, resulting in stock piling up at Chinese ports.

There were some 37 million tonnes of Brazilian iron ore at China’s 45 major ports on January 18, compared with around 24 million tonnes in mid-July, according to a local data provider. These compare with around 36 million tonnes of inventory at the start of 2018.

Another major source of low-alumina iron ore, typically in the form of concentrate, for Chinese steelmakers is the domestic market in China.

While domestic iron ore supply was restricted by government-imposed and voluntary production cuts in the winter of 2017-2018, restrictions this winter have been looser, market participants said.

China produced 68.42 million tonnes of run-of-mine iron ore in December, up 3.3% on the year, according to the National Bureau of Statistics.

The increased domestic supply also reduced the need for mills in northern China to source for seaborne low-alumina products, sources added.

That said, the Chinese government is not expected to lose its environmental focus in the coming months and while the supply of domestic concentrate in recent months is higher than a year earlier, the need for low-alumina materials in the longer term is expected to persist amid a lack of sufficient sources in China.

There is also the question of the response of seaborne iron ore suppliers to Chinese end users’ sensitivity toward impurities.

While Australian miners are individually taking steps to improve the quality of their iron ore and product mix in line with structural changes in Chinese buying patterns that favor higher-grade materials, the overall quality of Australian supply is expected to deteriorate in the longer term, a trader source in Singapore said.

“I doubt that the penalties will narrow much further. Smaller mills have lowered the usage of low-alumina fines in their blends, but bigger blast furnaces are unlikely to increase their tolerance of impurities such as alumina,” a mill source in east China said.

Market participants expect the interplay between supply flows and steel mills’ productivity needs to continue to drive demand for iron ore in the coming months, and in turn affect the penalties that the impurities attract.

Deepali Sharma in Singapore contributed to this report