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Trade Review: Q1 iron ore demand supported after steel output resumes end-2021

Highlights

Focus on MAC Fines amid speculative interest

Non-mainstream brand cargoes still actively traded

Lump, pellet demand experiences sluggish growth

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

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Buoyed by the rise in steel mill margins and the recovery in Chinese steel production from December 2021, Asian iron ore prices leapt 36.5% from its Q4 trough to end the year at $119/dmt.

However, the higher steel margins were not able to pull iron ore import margins out of the red in Q4, with seaborne prices consistently higher than port prices in November and December.

Meanwhile, the divergence between different iron ore brands and grades had increased in Q4 and will likely continue in Q1 this year.

MAC Fines steals the spotlight

For the first time on record, the divergence between derivative and physical markets dragged Fe-adjusted floating prices of Pilbara Blend Fines and Newman High Grade Fines into sustained discounts since late November.

On the one hand, for most of Q4, steady front months December 2021-February 2022 swaps contracts reflected expectations of a demand recovery, especially since many Chinese mills had increased blast furnace operations, having met their steel output cut targets by November.

On the other, Chinese mills were buying hand-to-mouth at ports due to the sizable import loss and the uncertainties surrounding output curbs for the upcoming Winter Olympics. For steel mills needing to restock prior to the Lunar New Year, the portside market offered a cheaper and more flexible alternative to seaborne.

Discounts for MAC Fines were the most resilient among the mainstream brands of medium-grade fines as the import loss for the MACF was the smallest, according to market sources.

MACF's qualities are close to Rio Tinto's PBF, the most liquid medium-grade fines brand, and yet it was trading at a discount to PBF, offering mills a cheaper alternative.

Furthermore, BHP was ramping up MACF supply from its South Flank mine, increasing its liquidity closer to that of PBF.

In the second half of Q4, the increase in MACF supply coupled with the reduction in PBF, pushed MACF to dominate the spot seaborne market for medium-grade fines, in terms of the number of trades from miners.

However, PBF supply is likely to improve in the coming months as Rio Tinto sold 11 strip PBF contracts in Q4 for delivery within the next few months. Despite the narrower MACF discount towards end-2021, the brand was still trading at substantially lower levels than before production was ramped up in Q2 2021.

In Q4, with traded prices rangebound, speculative buying interest emerged as Chinese steel output curbs started to ease and prices, together with China's environmental protection measures, kept a lid on high-cost iron ore supply. The proportion of fixed price spot deals grew against that of floating price deals for the four mainstream brands of medium-grade fines, namely PBF, NHGF, MACF and Brazilian Blend Fines.

MACF fixed price deals outnumbered the other brands.

Non-mainstream brands actively traded

S&P Global Platts observed a surge in the number of Vale's non-mainstream fines cargoes sold in the seaborne market; from nine spot deals in Q3 to 28 in Q4. This is despite Vale's plan to reduce its supply of high-silica low-margin products by 4 million mt in Q4 to maximize margins, according to Vale's Q3 production report.

These non-mainstream fines include brands other than Brazilian Blend Fines and Carajas Fines and have typically elevated silica content of 5%-25%. On Nov. 29, despite the increase in sales of its non-mainstream ore, Vale trimmed its 2021 output guidance to 315 million-320 million mt, from 315 million-335 million mt.

This year, BHP opened its South Flank mine, which is projected to produce 80 million mt/year at full capacity. The new mine boosted the availability of lump ores and lifted overall ore quality, BHP said in a statement.

In addition to the surge in spot MACF supply, Platts observed a sharp increase in spot Newman Blend Lump Unscreened cargoes; from one in Q3 to 10 in Q4. NBLLU is similar in specification with Newman Blend Lump -- 62.5% Fe, 3.55% silica and 1.7% alumina -- but its average size is below 6.3 mm at maximum 16%.

Lump, pellet demand growth sluggish

The seasonal uptick for direct feed prices in Q4, typically driven by sintering curbs during winter, was stunted in 2021 as steel margins declined amid output curbs.

There was not much preference heard for direct feed over sinter for most of Q4 as output curbs and power restrictions curtailed iron ore demand.

Seaborne lump premiums fell from 13 cents/dmtu on Oct. 1 to 10.3 cents/dmtu on Nov. 23, before rising to 20.3 cents/dmtu Dec. 31, Platts data showed. Premiums struggled to rise as demand was centered at ports, while blast furnace running rates were low in Q4.

The more affordable sinter hindered direct feed demand. Demand for Chinese domestic pellet was also higher given its cost efficiency. The high grade 65% Fe spot blast furnace pellet premium fell 36.4% from $76.70/dmt on Nov. 3 to $48.75/dmt on Nov. 24, the largest four-week decline of 2021, Platts data showed.

The impact on the 64% Fe blast furnace pellet prices was less pronounced.

Platts observed a surge in the number of spot Indian pellet traded on a CFR China basis, from four in Q3 to 17 in Q4. Relatively higher domestic pellet prices in India kept sales local, while CFR China Indian pellet trades were even fewer in October and November.

Indian pellet exports only picked up in December when China's demand for higher grade ores increased with the rise in steel margins and recovery in steel output, following the correction of domestic Indian iron ore prices.

There was preference for higher-grade pellets in November, with seven ex-India origin transacted. There has been expressions of demand for such pellets, but Indian supply is limited.