China's steel mills mull altering sinter feed blend as iron ore hits 6-year high

Singapore — Chinese steelmakers are considering adjusting their sinter feed blending ratios as the price of popular medium grades hit multi-year highs, increasing the value-in-use advantage of high grade ores, although practical limitations make widespread changes unlikely, market sources said Aug. 19.

S&P Global Platts assessed the medium grade 62% Fe Iron Ore Index at a six-year high Aug. 18, up $5.70/dmt day on day at $127.60/dry mt CFR North China.

A surge in iron ore prices over the past month on the back of tight supply for medium grade fines has narrowed the spread to high grade iron ore cargoes.

The spread between the Platts 65% and 62% index stood at $7.85/dmt Aug. 18, well below the $11.07/dmt averaged over 2019. The 65% and 64% pellet premiums were assessed at $3.20/dmt and $1.05/dmt respectively, after averaging $27.48/dmt and $22.64/dmt in 2019.

Market sources said the sustained tightness in medium grade supply posed a challenge for major end-users as significant operational adjustments were required to alter the sinter feed that take time to implement and rule out frequent adjustments, but the economics of using more higher grade orders were becoming too attractive to ignore.

When prices are volatile, there is typically a preference for using highly liquid medium grade products due to the risk of being stuck with expensive high grade cargoes that cannot be offloaded in the event of a price correction, one source said. However, the extended period of high iron ore prices has prompted many end-users to consider increasing their utilization of high grade raw materials, the source added.

Tight portside supply of iron ore will not be rectified immediately, so it is economically feasible to utilize more high grade fines for the near term, a Chinese end-user said.

Aside from the attractive value-in-use or VIU calculation, steel production rates are high as end-users capitalize on current steel margins, the source added.

The increase in the usage of direct feed cargoes will be gradual given that end-users typically slowly reduce utilization rates after winter, an international trader said. But negative lump premiums at the port and "0 VIU premiums" for pellets have already prompted smaller end-users to maximize their usage, the source added.

Market sources said increased seaborne demand for high grade cargoes also stemmed from their cheaper price levels to portside equivalents.

LOW GRADES ALSO GAIN

While there were end-users looking to chase productivity, there were also those looking to lower production costs through the higher utilization of low grade fines, sources said.

Not all mills were operating at attractive steel margins due to either geographical location or the nature of their production capacity, and some would be at a higher risk in the event of a steep fall in steel margins, market sources said.

Some end-users have slowly increased their usage of low grade fines to smooth out a possible transition in the event of a sharp decline in steel margins, an international trader said. The inflexibility with regards to high grade fines utilization also applies to a certain extent to low grade fines usage, the source added.

Amid the increase in demand for low grade fines, there were market participants who expected the price spread between Australian low grade fines and Indian low grade fines to widen further.

The sinter feed replacability of FMG's Super Special fines and Fortescue Blend Fines - SSF and FBF - is very close to that of Australian medium grade fines, as compared with Indian low grade fines, due to more similar chemical and physical specifications, a procurement source said. While there is an increased utilization of Indian low grade fines as well, the upper tolerance limit for their usage will be rather low, the source added.

The increased usage of domestic concentrates in China was also a notable trend for end-users, who also sought to utilize its low alumina levels to allow for increased usage of lower grade materials.

However market expectations were that the limitations for altering sinter feed blends due to the structural heavy reliance on medium grade fines would limit sinter feed changes in the near term at current price levels.

There are no products that have the same market volume to replace medium grade Australian fines to a significant degree, so support for medium grade fines would continue unless the supply situation improved, a source said.