Iron ore quality differentials evolve as market fundamentals shift

Since January S&P Global Platts quality differentials for the gangue elements such as alumina, silica and phosphorous have evolved to reflect changing market fundamentals.

The alumina differential soared 100% from $1.50/dmt in January 2018 to $3.00/dmt in May 2018. Phosphorous has also seen large increases from a steady $1.30/dmt throughout the last quarter of 2017 to $2.50/dmt on May 18, where it has remained.

The most extreme moves have been seen across both silica differentials, but especially the high silica band of 6.5-9%, which collapsed from $7.00/dmt in January to $2.50/dmt today and is still on a downward trend despite a strong steel mill margin recorded to date.

A TIGHTENED SUPPLY

The recent fall in the silica discounts has been triggered by an adjustment in global supply. The winter seasonal reduction in Chinese domestic supply, which typically contains elevated silica, was one contributor.

The second was the announcement from Vale that it will cut 19 million mt of supply from the high-silica mining area, the Southern System.

This has resulted in lower silica in Vale’s flagship product BRBF. The overall global balance of silica supply in iron ore products has declined, meaning silica differentials have retreated.

LOW ALUMINA IN HIGH DEMAND

Aluminum and phosphorous have remained at elevated levels. In general, products from the Pilbara, Western Australia tend to have higher alumina than those from Brazil. A purchasing manager at a steel mill in the Hebei province said: "The higher premium on low-alumina cargoes and the larger discount on high alumina cargoes both suggest that BRBF price performance was stronger, even compared to Pilbara Blend Fines."

The chart above shows Chinese port stocks of iron ore with a widening divergence by origin, with demand continuing to focus on low-alumina ores, reducing Brazilian stocks as Australian ore stocks rise. Adding to the tightness is declining Chinese domestic supply due to increased production costs for the first quarter of 2018. “Demand for cargoes with different specifications for sintering played a more important role when concluding the trades,” a Singapore-based trader said. “With the thinning out of low-alumina iron ore supply, mills were actively seeking low alumina feedstock, which were composed mainly of domestic Chinese concentrates or Brazilian materials.” Besides, the largest pellet supplier into China is India, sending around 800,000 mt/month of pellets. Indian pellets are generally higher in alumina than pellets from Brazil, historically the largest supplier of pellets into China prior to the Samarco incident.

High alumina levels can hurt productivity in the short term in the blast furnace by increasing the viscosity of the slag. This can slow the process of tapping the slag prior to the hot metal. Over the long term, high alumina can also cause a build-up of solids that precipitate from gas in the upper cooler zone on the blast furnace walls. It is possible that the build-up of solid matter can grow and eventually drop into the burden mix. This can cause a temporary cooling of the burden, reducing productivity and increasing coke demand to bring it back up to the required temperature.

SILICA PENALTIES AND METALLURGICAL COAL PRICES

Aside from the adjustment in global supply that has reduced silica differentials, falling metallurgical coal and coke prices could be another contributing factor. In a blast furnace, the formation of a suitable slag is critical to maintain optimal conditions. The level of silica relative to other compounds, notably the ratio with CaO (sourced from the flux), helps determine slag conditioning. The melting of metal and slag is aided by reduction reactions, provided by combustion of reductants, mainly coke. In simple terms, the higher the slag volume per mt of hot metal, the higher the rate of coke consumption and reductant costs. A general rule of thumb in furnace chemistry is that for every +0.1% Si increase in hot metal, the coke rate increases by +6.5kg per mt. So we believe the silica penalty should in part be a reflection of metallurgical coal and coke prices, which directly affect the cost of reductants in the iron-making process.

Both metallurgical coal and coke prices fell more than 20% between January and April, before settling at approximately $198/mt and $317/mt, respectively, in the last week. The chart above shows a positive correlation, especially between low-silica differentials and domestic coke prices. According to Platts calculations, the latest average silica penalty of $0.50/dmt observed in the spot trade would reflect a much lower coke price than we see today. At current coke prices, we would expect the silica penalty differentials to recover, especially as the steel mill margin continues to hold strong.