Asian iron ore lump premiums remain strong, defying seasonal trend

Iron ore lump premiums have shown unusual strength this year, bucking seasonal expectations of softening in Q2, thanks to resilient demand and constrained supply.

Premiums strengthened by 4 cents/dmtu on the day on June 2 to reach 56 cents/dmtu, backed by an incrementally raised bid during S&P Global Platts Market On Close assessment process.

On June 4, a spot cargo of Newman Blend Lump, or NML, loading July 6 to 15 was snatched up on brokerage platform COREX at a premium of 69 cents/dmtu over the July average of IODEX priced on an FOB basis, to be delivered CFR China. Even as the level at which the trade took place was deemed too high by the market for it to be repeatable, it and the bid at 56 cents/dmtu on June 2 clearly pointed towards market fundamentals that were stronger than before.

China's environmental policies have supported lump demand in 2021. Tangshan production curbs from March 20 to the end of the year have constrained sintering operations the most, forcing mills to use more lump and pellet than in previous years.

Sources expected sintering constraints to remain in place even if Tangshan were to relax production curbs in the future, as the local government aims to improve air quality and remove the city from the list of ten most-polluted Chinese cities this year.

Strong margins for portside sales in Shandong province and at Yangtze River ports have incentivized purchases of seaborne lump, according to sources. Stocks of Pilbara Blend Lump, or PBL, at Shandong ports were dwindling, and Shandong-based mills prefer using PBL. Environmental inspections at some Shandong ports also limited the buying interest of unscreened lump due to a lack of operating screening facilities, supporting lump prices there. Recent adverse weather in southern China also hindered lump cargoes from reaching ports along the Yangtze River, supporting the price spread between lump and fines at river ports.

Outside of China, some Japanese mills were said to be looking for spot lump cargoes too. In the week ended May 29, a NBL cargo was heard sold by an international trader to a Japanese end-user at a premium of around $5.3/dmt over the June average of IODEX plus lump premium for early June loading on a CFR Qingdao basis. Spot demand still exists from Japan for July and August loading lump cargoes, sources told Platts.

On the supply side, mainstream lump availability remained tight despite signs of easing slowly. Based on spot transaction data compiled by Platts, Rio Tinto has not sold a single PBL spot cargo since Feb. 4. Market sources told Platts that Rio Tinto has sold more SP10 lump instead in recent months to manage quality issues at its mines. Some sources expected no significant change to this situation in the near term. BHP started to release spot NML cargoes since mid-April, three months after their last spot NML sale in mid-January. Supply of NML was heard to be slowly recovering but some sources did not expect full recovery until Q4 this year.

However, narrowing steel margins were heard to be forcing some Chinese mills to look for cheaper, non-mainstream lump options. A couple of Hebei-based end-user sources told Platts that mainstream lump is not cost-efficient compared to pellet and sinter now, and steel mills with flexible ore blending options have already switched to non-mainstream lump or reduced lump usage in their blast furnaces. A trader source also said that portside buying of lump has ground to a halt in Hebei province.

However, sources told Platts that stocks for lump, including mainstream and non-mainstream brands, were not low at Chinese ports. If steel margins remain under pressure, more mills would be expected to reduce their mainstream lump usage. "Due to margin pressure, it is already difficult to sell premium products such as pellets. Lump demand could soften next," said another trader source. Moreover, the rainy season in southern China could also start to suppress lump demand.