TRADE REVIEW: Seaborne iron ore market in Asia braces for sluggish Q3 amid dimmer outlook

This report is part of the S&P Global Commodity Insights' Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, metallurgical coal, copper , alumina , cobalt , lithium , nickel and steel and scrap . We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Asian iron ore prices looked set for continued bearishness in the July-September quarter on lukewarm demand fundamentals, though recovery in downstream steel margins have instilled some short-term optimism in pockets of the seaborne market.

The Platts Iron Ore Index, or IODEX, averaged at $111.8/dry mt CFR North China in Q2, down 10.5% on the quarter, and analysts at S&P Global Commodity Insights forecast it to further dip to an average of $105/dmt in Q3.

Moving forward, mill margins are likely to remain under pressure and sentiment bearish given the weak housing market data, according to Commodity Insights analysts.

High iron content materials find firm footing

Buy-side support for higher Fe content Brazilian fines was resilient through Q2, leading to a wider 65%-62% Fe spread on the quarter as a reflection of recovery in Chinese downstream margins, while an influx of high silica, low iron content cargoes from Brazil too piqued end-users' preference for Iron Ore Carajas (IOCJ) as a blending feedstock.

The 65%-62% Fe spread -- an indication for high-over-medium-grade fines as sintering feedstock -- was at $15.7/dmt on June 28, widening 37% from April 1.

Demand for Brazilian high-grade fines was evident from a strong uptick in spot trading activity in Q2, with 15 cargoes of Vale's low alumina, low silica Carajas fines traded compared with 10 in Q1. The total volume traded rose 64% to 2.36 million mt.

The upturn in downstream demand has aided production margins, with steel mills able to afford higher grade fines.

In addition, through the quarter, market sources observed an influx of Brazilian higher silica content sinter feed, with abundant volumes of brands such as Sinter Feed High Silica Tubarao (SFHT), Special Fines Carajas (SFCJ), and IOC6.

This, too, resulted in end-users pivoting towards better quality products such as high-grade Carajas as the blast furnace feedstock, contributing to increasing volumes seen traded on the quarter.

Lofty demand for direct charge iron ores

Fundamentals for direct-feed materials seaborne lump and pellet were sturdy through the pre-summer period on stronger margins, coupled with an increase in blending ratio of the feedstock.

The total number of spot Newman Blend Lump (NBL) and Pilbara Blend Lump (PBL) cargoes observed to have been sold by Australian miners BHP and Rio Tinto in Q2 was 41, up 41% from Q1, data from Commodity Insights showed. The volume equivalent was also up around 43% to 3.92 million mt.

Optimism for the seaborne lump market has been steadily growing, with the port inventory of lump heard falling since end-May.

Some steel mills in Shandong in eastern China and alongside the Yangtze River ports were heard to have increased their lump usage rate in the past two months to over 25%, as they saw the cost-effectiveness of lump with the recovery in steel mill margins through the quarter.

In Q2, although there has been pockets of supply of unscreened Newman Blend Lump, South African lumps, and Brazilian lumps such as LOCJ, demand from Chinese steel mills was largely inelastic, as they preferred the standard medium grade Australian lumps and the demand concentrated around Pilbara Blend Lump and Newman Blend Lump.

The seaborne lump premium was at 20 cents/dmtu June 28, from 6.5 cents/dmtu on April 1.

Premiums for seaborne pellet too mirrored upticks through the quarter, fundamentally supported by stronger steel demand, better liquidity and its cost effectiveness when compared to the already strong lump premiums.

The weekly-assessed spot high-grade pellet premium over IODEX was at $15.3/dmt CFR North China on June 26, after adjusting to a 65% Fe basis, rising around 30% from April 3. The daily 63% Fe blast furnace pellet premium was at $6.75/dmt on June 28, up around 73% over the same period.

Although pellet premiums have been on the rise, the feedstock was still considered a more cost competitive option as compared to lump.

"Iron ore pellet premiums found some support in June from buyers switching away from lump as its premiums had risen too strongly. We expect thin margins will limit the upside for pellet premiums however and see China blast furnace pellet premiums over IODEX averaging $12/dmt in 2024," according to analysts at Commodity Insights.

Sinter feedstock preferences around cost effectiveness

Several medium grade iron ore fines changed hands through Q2 with the substitution of BHP's Mining Area C Fines (MACF) for its Newman High Grade Fines (NHGF) being most prominent with considerations over quality and cost effectiveness, as margins hovered around the breakeven point.

The volume of spot MACF cargoes in Q2 was up 68% on the quarter at 5.2 million mt, with a 69% increase in the number of trades observed, while the volume of spot NHGF cargoes over the same period fell 25% to 2.89 million mt, with a reduction of 29% in the number of deals heard concluded.

for both flagship medium grade iron ore, for cargoes with loadport laycan on or after July 1, 2024, according to market sources.

The impact on cargo pricing has been largely absorbed by the seaborne market participants with many aware that Fe content for both brands, along with the impurities, have changed.

As margins were hovering around the breakeven point, mills were cautious and specific about their procurements where MACF took the centerstage as it displaces NGHF as the sintering feedstock for many.

There is a possibility to see shifts in the mainstream medium grade fines where better-quality brands could make a stronger footprint in the raw material mix, according to a China-based steel mill source.

Although import volumes from China, the key demand center for Asia iron ore, is expected to tick higher on the year, its growth is likely to slow down over the second half of the year with an estimated annual figure of 1.208 billion mt, analysts said.