LME WEEK 2019: Market sees short-term support for iron ore prices

Seaborne iron ore prices looked set to find support from restocking demand in China in October but the outlook for the rest of the quarter and months ahead is uncertain.

The spread between the mid-grade iron ore products, represented by Fastmarkets’ index for 62% Fe iron ore, and the high-grade materials, represented by Fastmarkets’ index for 65% Fe iron ore stood at $6.60 per tonne in September this year, the lowest in three years.

The narrowing of grade spreads has underlined the connection between China’s iron ore preferences and steel mills’ margins.

It has also been a result of the major supply disruptions in the mid-grade segment in 2019, abundant availability of domestic Chinese supply incentivized by high prices and ample shipments of seaborne concentrate.

Restocking demand from mills was set to trigger a resurgence in iron ore orders immediately after the National Day holiday October 1-7.

Steel mills were heard to be running at lower inventories amid tighter environmental restrictions affecting steelmaking and transport in the run-up to the 70th anniversary of the country’s founding.

Some market participants expect the acceptance of mid-grade Brazilian fines - especially Brazilian Blend Fines - to improve given the price gap between such materials and the Australian mainstream Pilbara Blend Fines.

The gap between Fastmarkets’ index for 62% Fe iron ore cfr Qingdao and the 62% Fe iron ore low-alumina index averaged around $2 per tonne in September this year. At the same time in 2018, the low-alumina index was $5.90 per tonne higher.

Given steelmaking restrictions, the use of high-grade fines such as Iron Ore Carajas should improve while mills chase hot metal yield. But abundant supply and narrow margins at mills will limit any significant gains, sources said.

While the market was certain of a short-term rise in prices immediately after October’s holiday break in China, the outlook beyond that is less clear amid uncertain downstream demand.

Robust mill margins, which have become a feature of the Chinese steel market since 2016, have a direct effect on the country’s quality preferences in iron ore procurement.

A protracted trade war with the United States, however, has unnerved market confidence in the outlook for downstream demand. The rhetoric of a trade war may ramp up further when the US starts to prepare for its 2020 presidential election.

At an industry event organized by the China Iron and Steel Association (CISA) in Qingdao this year, a leading executive from the organization said that “out-of-cycle” stimulus measures from the government had allowed the steel industry to show resolve during the “complicated international economic environment.”

Another executive from the country’s Development Research Center of the State Council said urban rail projects are likely to keep steel products in demand for the future.

The government this year announced several such projects , including at Changchun in Jilin province and Suzhou in Jiangsu province and later in the Hubei and Sichuan provinces.

Economic growth through infrastructure development has also been helped by policies such as the lowering of the reserve requirement ratio by the central bank.

Continued support from the government may also benefit the steel sector into 2020 but some participants believe China will actually pursue a more realistic growth path for its economy in the future - one that will be less reliant on government bailouts.

Long term
To continue on a path of high-quality development, the Chinese iron and steel industry needs mills and miners to be profitable, the CISA executive said.

The path to that development may lie in increased usage of ferrous scrap for steelmaking, even though the increase in China’s steel production in the past decade has largely come from blast furnace (BF) output.

Rising availability of ferrous scrap in China and a push for more environmentally friendly processes may facilitate the growth of electric-arc furnace (EAF) facilities.

Yet investment in EAF usage would be mitigated by two factors: Much of China’s BF capacity is still considered newly built; and there is a lack of clear economic incentives to go down that route.

Another area of development may be the country’s steelmaking production shifting to coastal areas.

Estimates put China’s coastal steel production at around 20-30% of its overall production. By contrast, the majority of steel production in Japan and South Korea is coastal.

Many in the market view the shift to coastal areas and the establishment of bigger BFs in China as inevitable structural changes.

Such changes should provide further impetus for use of higher-quality seaborne iron ore. Global companies are already anticipating this by investing in high-quality projects.

Even as China continues to play a pivotal role in shaping iron ore supply and demand, weak steel market sentiment outside the country persists.

That sentiment manifested itself in iron ore in 2019 when mills renegotiated their annual pellet premiums for the October-December period, leading to talks of shorter-term pricing based on the Fastmarkets 65% Fe iron ore index for next year.

Supply proved to be the dominant factor affecting iron ore prices this year. The structure of Chinese steel demand and the level to which the Chinese government will be willing to support it may emerge as the top factor in 2020.

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