IRON ORE MONTHLY: Traded volumes for SGX’s 65% Fe contract hit new record

The seaborne iron ore market maintained its momentum in March, even with the Covid-19 pandemic causing turmoil for the global economic outlook and leading to steel production cuts and weakening demand outside of China.

The monthly average price for 62% Fe iron ore was largely stable at $88.58 per tonne cfr China in March, while that for 65% Fe iron ore was at $103.45 per tonne. The price spread between 65% Fe and 62% Fe breached $15 per tonne due to supply disruptions in Brazil.

Trading volumes for the Singapore Exchange’s 65% Fe swaps contract, which is settled against Fastmarkets’ daily index for iron ore 65% Fe Brazil-origin fines, cfr Qingdao, saw a new record last month of 38,526 lots, up 25% from February during a volatile month.

Lee Taylor, senior iron ore broker at Mysteel Commodity Services (MCS) said his company was “pleased to see the continued growth in the Fastmarkets 65% futures contract, with MCS having been instrumental in assisting new participants in this product.”

“In light of the recent moves seen in 62% futures, and the uncertainty of market direction due to the worldwide Covid 19 pandemic, it is good to see that the 65% has held its market worth alongside its established cousin contract,” Taylor added.

“Physical clients are noticing more transparency to hedge the Fastmarkets 65% [contract] with its expanding depth, and financial players are also seeing value and opportunities adding the 65% to their portfolio,” he explained.

James Huang, senior iron ore broker from GFI Group attributed the rising 65% Fe contract volumes to the increasing interest among participants in both hedging their outright high-grade exposure and in trading the 65/62 spread.

“Demand for imported iron ore concentrates, which are priced basis the 65% Fe iron ore index, in China also improved with the Covid-19 virus spread affecting domestic concentrates supply,” he said, adding that this further increased the demand for price risk management using the derivative contract.

The broker also noted that with trading margins for high-grade ores such as Iron Ore Carajas and imported concentrates at Chinese ports decent, traders were motivated to lock in their purchase costs using the 65% Fe iron ore contract. Traders typically do this by using a combination of floating and fixed-price paper and physical market transactions to manage their risks.

On grade spreads, Huang highlighted that theoretically speaking, the change in mills’ profitability is a direct factor based on which mills would adjust their consumption ratio of 65% and 62% Fe fines, which leads to increased 65/62% spread trading.

He also noticed that besides physical market participation, speculative demand for 65/62 spread trading has emerged recently in line with the increased market volatility.

Price moves
Supply concerns lingered in the market during the whole of March, which to some extent supported iron ore prices despite other commodities, such as oil and copper, both displaying a steep downtrend. 

Lockdowns since late March in South Africa and India – the third and fourth-largest iron ore suppliers to China – fueled the supply concerns. South Africa and India accounted for 66.73 million tonnes of exports to China last year, or more than 6% of China’s total imports, according to Chinese customs data.

Ports operating in South Africa and India for iron ore have not yet closed, according to market sources, but efficiency at the ports and transport in the two countries is largely affected, which in turn will slow down cargo arrivals to China.

China has seen a gradual resumption of transport, business and construction activities during March, which has led to a depletion of inventories at mills and higher rebar prices in the spot market.

Fastmarkets’ daily price assessment for steel reinforcing bar (rebar) domestic, ex-warehouse Eastern China, averaged 3,448-3,477 yuan ($486-490) per tonne in March, up by an average of about 1.6% month on month.

Global steel-consuming industries – automotive in particular – have not been exempt from the impact of the pandemic, with production cutbacks announced by producers in Europe, Japan and South Korea.

A few cargoes were heard to be reselling from Japan and South Korea to China in late March, which also added pressure and uncertainty to iron ore prices.
Another cause for concern in the market is mills’ profitability following the resumption of electric-arc furnace production and lower billet imports from CIS countries, which are expected to squeeze industrial margins.

Pressure on mills’ profitability usually triggers some changes in consumption in terms of different grades of iron ore, but this has not been seen in the market due to a supply shortage of high-grades fines, especially iron ore Carajas fines.

Traders in the secondary market holding IOCJ cargoes were more willing to maintain their offers because of the high price they can fetch in port markets and robust demand from local mills.

But margins for HRC production have narrowed to almost zero, while those for rebar are around 200 yuan per tonne, according to several mill sources.

Market news
Vale said the Covid-19 pandemic could reduce the supply of iron ore in the seaborne market by around 18 million tonnes in 2020 given the global lockdowns and restrictions on activity.

Government actions intended to contain the spread of the virus have led to output cuts in South Africa, Canada, India, Peru and Malaysia, Vale said. Supply from other African countries is also reduced, it added.

The Brazilian miner said on March 23 it had reverted to a previous decision to suspend activities at Teluk Rubiah Maritime Terminal (TRMT), its distribution center in Malaysia, until March 31 at a minimum, due to intermittent material supply.

Ships will then be redirected to blending units in China, the company said, adding that overall production and sales volumes should not be affected.

Vale, expects first-quarter sales to be 500,000 tonnes short of its previous guidance. The company had already lowered its January-March output guidance by 5 million tonnes on February 11, to 63-68 million tonnes of iron ore fines from 68-73 million tonnes previously.

Anglo American is expecting a production impact of 2-3 million tonnes at its Kumba iron ore operations in 2020, following its decision to operate with around half of its workforce during a 21-day lockdown in Africa that started on March 24.

The miner issued production guidance of 42-43 million tonnes for its Kumba operations in its last quarterly report.

On March 24, India’s Prime Minister Narendra Modi announced a 21-day lockdown in the country.

Several ports in India have declared force majeure, which serve to protect them from being penalized for failing to meet their contractual agreements due to circumstances beyond their control.

Despite these declarations, port operations have not stopped entirely, according to market sources. But a shortage of stevedores and dump truck drivers is affecting unloading operations.

Brazilian iron ore and steel producer Companhia Siderúrgica Nacional (CSN) said iron ore prices and volumes for Brazil-origin material have been affected by heavy rainfall in the first quarter of 2020. It expects operations to be back to normal by April.

CSN is maintaining its full-year guidance to sell 40 million tonnes of iron ore in 2020, because it believes it can compensate for any production and sales losses later in the year.

Brazil’s iron ore exports plunged year on year in February, while heavy rains in the southeastern region adversely affected production and transport. But higher average prices partly offset the drop in volumes, the country’s ministry of economy said on Monday March 2.

Member mills of the China Iron & Steel Association (Cisa) reported a 1.84% increase in their daily crude steel production to 1.84 million tonnes during the middle March, compared with early March. Steel inventory at plants registered a 7.4% decline to 19.82 million tonnes.

ArcelorMittal’s sourcing business declared force majeure on contracts due to the spread of the coronavirus in Europe, according to a letter seen by Fastmarkets.

Some sources said the company’s reduced downstream operations and the wider suppressed European steel market outlook may also have implications for iron ore demand in the region, with cargoes likely to be diverted to China.

China’s iron ore imports rose by 1.5% year on year to 176.84 million tonnes in January-February 2020 amid the Lunar New Year shutdown and coronavirus spread, the country’s General Administration for Customs said.

Before Chinese New Year, iron ore demand from China was generally good because steel mills prefer to restock material while blast furnaces (BFs) continue to work during the holiday.