Fall in iron ore price prompts rethink on grade differentials

As the iron ore market gathers in the Czech capital of Prague this week, a reevalution of iron ore products may be underway, based on lower pricing and changes in supplies. This may be increasing an urgency to stay competitive and secure attractive outlets.

An overriding issue will be the recent 40% or so decline in reference spot fines prices delivered to China in the past three months. In a twist of fate, prices are trending close to where they were a year ago, falling back after a peak late 2016 and strengthening further into Q1.

However, more than the latest price decline, regional pricing premiums in segments such as pellets, concentrates and lump may be increasingly fought out. These premiums are taking on a larger share of overall pricing, given the sharp decline for fines.

A focus on defeating effects from higher silica content from southern Brazil ores and care around phosphorous levels remain key areas in procurement executives’ plans.

At the same time, the huge relative discounts now on offer for lower grade, and higher alumina fines, may make new combinations and Australian ores in new markets more attractive.

The buyers coming together with traders, miners and service providers at banks and shipping groups are predominantly securing materials for mills in Europe, the Middle East and the US.

Their focus is on efficiency and high utilization rates at the mills, and for iron ores to eventually meet qualities of steel for the more demanding applications in the market, and to customers with tighter tolerances.

A combination of greater Atlantic demand to secure expanding supplies of Vale's Carajas fines from northeast Brazil, along with widening interest in blast furnace grade pellets into new US and Middle East plants may be seen.

The right value-in-use to justify pricing relativities among grades, and material availability, will determine changing allocations and portfolio make up.

Usage of BF pellets growing at DRI and HBI plants, in addition to furnaces, is adding a twist, with suppliers of lower silica and alumina pellets finding a wider pool of bidders.

PRICES DOWN

The elephant in the room, though, is price.

While spot iron ore has a history of price volatility and sub $60/dry mt CFR China prices may prompt new suppliers to reevaluate operating, the recent decline is partly dictated by long-running fundamentals.

An increase in supplies from Australia first, and since last year from Brazil, with more concern on China's steel output longevity are factored in.

Chinese government policies around propping up its economy in a transition to greater consumerism and environmental awareness of air quality and mining emissions are a key driver for imports.

As for Beijing, providing sufficient stimulus for the country's steel production and demand this is mainly via infrastructure projects -- the One Belt One Road a convenient soundbite for part of the largesse -- and managing property demand growth.

This too is injecting further swings in iron ore demand and pricing.

It all comes as futures markets in steel, iron ore and coking coal in China and Singapore further influence physical purchasing sentiment.

China's steel output was still growing this year, with hot metal rates up 4.4% year-on-year through April, despite widespread industry belief a peak in production has already been reached, or is near.

As for supply additions, Vale believes the market may be balanced this year, on higher demand, and more focus on low silica and alumina grades. A ramp up at Carajas is the biggest new supply factor, which it will ultimately control.

Global iron ore supply may increase by 70 million mt globally this year, Vale said in April, accounting for supplies to cover just over 5% of China's crude steel output.

Carajas shipped for blending in Asia may lead European and Persian Gulf buyers to remain concerned around the availability of high grade supplies.

Prague may be the occasion to ensure visibility in supplies and the right pricing relativity.