CHINA WANTS MORE HIGH-GRADE IRON ORE

The Gulf Today - Business - - SPECIAL REPORT -

LAUNCE­S­TON: There may be a slight prob­lem with the pre­vail­ing theme for the iron ore mar­ket this year, namely that China is in­creas­ingly in­ter­ested in us­ing high­er­grade ore as part of ef­forts to boost out­put and lower per unit pol­lu­tion.

While Chi­nese steel mills may well be seek­ing to boost the use of high-grade iron ore fines and pel­lets, this isn’t ex­actly show­ing up in the im­port num­bers.

The over­all fig­ure for Chi­nese iron ore im­ports is one of sta­bil­ity, with cus­toms data re­leased on June 8 show­ing 447.5 mil­lion tonnes ar­riv­ing in the first five months of the year, up a scant 0.7 per cent from the same pe­riod last year.

The break­down of the data is some­what trick­ier, given that the Chi­nese govern­ment hasn’t re­leased the de­tailed coun­try-by-coun­try num­bers for April, and hasn’t pro­vided a rea­son for with­hold­ing the num­bers.

How­ever, ves­sel-track­ing and port data com­piled by Thom­son Reuters Sup­ply Chain and Com­mod­ity Fore­casts, which has a strong cor­re­la­tion with the of­fi­cial num­bers, in­di­cates that China is still tak­ing large quan­ti­ties of medium- and low­grade iron ore.

In the first five months of the year 289.3 mil­lion tonnes of Aus­tralian iron ore ar­rived at Chi­nese ports, ac­cord­ing to the data.

The vast ma­jor­ity of Aus­tralian ore is 62 per cent iron con­tent, such as that mined by top pro­ducer Rio Tinto, or the lower 58 per cent, as pro­duced by the coun­try’s third-ranked miner Fortes­cue Me­tals Group.

Very lit­tle of Aus­tralia’s out­put is the high-grade 65 per cent iron ore fines, or high-grade pel­lets.

But Aus­tralia ap­pears to have in­creased its share of China’s se­aborne iron ore im­ports so far this year, with the ves­sel-track­ing data show­ing a 4.9 per cent gain from the first five months of 2017.

Brazil, which is the main sup­plier of higher-grade iron ore, hasn’t been able to in­crease its share of China’s se­aborne iron ore mar­ket, ac­cord­ing to the ship­ping data.

China im­ported 83.1 mil­lion tonnes from Brazil in the first five months of the year, down frac­tion­ally from the 83.5 mil­lion for the same pe­riod in 2017.

The Brazil­ian sit­u­a­tion is some­what com­pli­cated by the dis­tri­bu­tion cen­tre run in Malaysia by Vale, but the ship­ping data doesn’t show any ma­jor spike from the South­east Asian na­tion, with China’s im­ports ris­ing 800,000 tonnes to 8.9 mil­lion in the Jan­uary-may pe­riod.

One high-grade iron ore pro­ducer that has seen a sig­nif­i­cant in­crease of its ship­ments to China, at least in per­cent­age terms, is Peru. China’s im­ports in the first five months jumped 19.4 per cent.

How­ever, this is off a small base and China’s im­ports from the South Amer­i­can pro­ducer to­talled only 8 mil­lion tonnes in the first five months of 2018.

An­other pro­ducer of high-grade iron ore is South Africa, which is the third-big­gest sup­plier to China.

How­ever, China’s im­ports from South Africa were largely steady in the first five months of the year at 15.4 mil­lion tonnes, down from 15.7 mil­lion in the same pe­riod last year.

TIGHT­NESS

It’s likely that while China’s steel mills are want­ing to use higher-grade iron ore, the prob­lem is in sourc­ing ad­di­tional sup­plies.

Much of the new iron ore brought to mar­ket in re­cent years has been of medium or low qual­ity.

This has re­sulted in the price for higher grade ore out­per­form­ing in re­cent months, with Ar­gus Me­dia as­sess­ing 65 per cent ore in China at $88.55 a tonne on Tues­day, a pre­mium of $22.90 a tonne to the 62 per cent grade.

This means the price of high­er­grade ore is cur­rently 35 per cent above the medium-grade, which is a sub­stan­tial widen­ing from the 19 per cent pre­mium that pre­vailed at the end of last year.

The dis­count for low-grade ore with 58 per cent iron con­tent to medium-grade has also widened, go­ing from 27 per cent at the end of 2016 to 45 per cent by the end of 2017.

Cur­rently, it is 42 per cent, ac­cord­ing to Metal Bul­letin’s as­sess­ment of 62 per cent ore at $67.23 a tonne on Tues­day and 58 per cent ore at $39.29.

Over­all, the cur­rent pric­ing in the mar­ket sug­gests that sup­plies of higher-grade iron ore re­main tight, but low-grade car­goes are still find­ing buy­ers, and the dis­count has set­tled into a new range.

Iron ore prices rose on Tues­day, sup­ported by strength in Chi­nese steel mar­kets. Ac­cord­ing to Metal Bul­letin, the spot price for bench­mark 62 per cent fines rose 0.7 per cent to $67.23 a tonne, largely rev­ers­ing much of the 1 per cent de­cline seen a day ear­lier.

As seen in the chart be­low, the bench­mark has been stuck in a nar­row trad­ing band for much of the past three months.

Lower grade ores out­per­formed dur­ing the ses­sion with 58 per cent fines adding 1.2 per cent to $39.29 a tonne. In con­trast, higher grades lagged with 65 per cent fines dip­ping 0.2 per cent to $88.20 a tonne.

The mixed per­for­mance fol­lowed re­newed buy­ing in Chi­nese spot and steel fu­tures on Tues­day.

Ac­cord­ing to Reuters, China’s top steel­mak­ing com­pa­nies — Baoshan Iron & Steel and Wuhan Iron and Steel — said they will in­crease prices of some hot-rolled coil, beam and steel wire prod­ucts for July de­liv­ery.

That fol­lowed a sep­a­rate an­nounce­ment on Mon­day from Jiangsu Sha­gang Group, China’s largest pri­vately-owned steel mill by pro­duc­tion ca­pac­ity, that it would lift spot re­bar and some wire prod­ucts prices for June 11-20 de­liv­ery.

The news helped to boost spot steel prices, some­thing that flowed through to fu­tures mar­kets dur­ing the ses­sion.

Re­bar fu­tures on the Shanghai Fu­tures Ex­change closed Tues­day’s day ses­sion at 3,856 yuan, well above Mon­day’s night ses­sion close of 3,811 yuan a tonne.

It was the high­est close for the Oc­to­ber 2018 con­tract since De­cem­ber last year.

The strength in re­bar fu­tures helped to re­verse ear­lier losses for iron ore fu­tures in Dalian which fin­ished trade at 473.5 yuan, up marginally from the 470.5 yuan level it closed on Mon­day evening.

How­ever, as seen in the score­board be­low, fu­tures put in a mixed per­for­mance in overnight trade with re­bar fu­tures hold­ing onto ear­lier gains while iron ore con­tracts suc­cumbed to profit-tak­ing.

Trade in Chi­nese com­mod­ity fu­tures will re­sume at 11am AEST.

From a longer-term per­spec­tive, Vivek Dhar, Min­ing and En­ergy Com­modi­ties An­a­lyst at the Com­mon­wealth Bank, says higher iron ore grades are likely to re­main sup­ported in the pe­riod ahead, es­pe­cially should steel prices re­main el­e­vated.

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