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Trade review: Soaring iron ore prices set to face hurdles in Q1

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Trade review: Soaring iron ore prices set to face hurdles in Q1

Highlights

Benchmark iron ore prices hit multi-year highs in Q4

Mills prefer medium grade fines to manage costs

Lower iron ore supply in Q1 may offset impact of mill margin squeeze

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 metallurgical coal, iron ore, scrap and alumina. 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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Seaborne iron ore prices defied the usual late year seasonal slowdown to hit multi-year highs in the final quarter of 2020, with demand fueled by strong steel margins and high output -- but margin pressures and the seasonal Lunar New Year holiday slowdown are likely to take the heat out of the rally in the first quarter of 2021.

The S&P Global Platts 62% Fe Iron Ore fines index, or IODEX, surged to a nine-year high at $177.15/dry mt CFR China Dec. 21, after starting the quarter at $123.15/mt, due to a combination of speculative buying and restocking ahead of winter and Lunar New Year.

End-users found mainstream medium grade fines the most cost-effective in Q4 due to their adequate liquidity in a volatile price environment.

Chinese steel margins, particularly for domestic rebar, have since come under pressure in early January, which could spur some pushback on rising iron ore prices. China's ban on Australian coking coal imports has increased both CFR and domestic prices, eroding steel margins in the process, although flat steel margins have been more robust due to the recovery in manufacturing.

Beijing is expected to further tighten credit conditions in 2021 and constrain financing for property developers, which could result in some downward pressure on prices.

Iron ore prices in Q1 will likely find support in lower supply from Australia and Brazil due to wet weather curtailing exports. The Platts Iron Ore & Steel Outlook survey for the quarter found that 62% of respondents expected the IODEX to sit just above $120/mt CFR -- a big price correction from current levels, and likely to prove a conservative view.

STEEL MILLS GO MAINSTREAM

Trade review: Iron ore | Floating brand assessments

Spreads between the mainstream MNP fines -- Mining Area C, Newman and Pilbara Blend -- gradually narrowed over Q4 and formed the bulk of sinter feed for Chinese mills. To a certain extent, these iron ore products are interchangeable.

High domestic coke prices meant end-users were reluctant to make significant changes to their blast furnace operations that would result in higher coking costs. This resulted in mills preferring a more streamlined sinter feed blend, a situation likely to continue in Q1 if China's domestic coke prices strengthen further.

Spot premiums for Pilbara Blend fines or PBF surged to a quarterly high of more than $5/dmt over the loading month in October, dampening speculative interest as seaborne prices became higher than those at port.

The trend of procuring cargoes from ports led to an increasing lack of liquidity for seaborne cargoes. Selling pressure emerged as premiums for January loading PBF fell to less than $3/dmt, with sellers looking to avoid landing cargoes.

Trade review: Iron ore | IODEX against portside equivalent

Despite strong appetite for port stocks, material held at Chinese ports ended 2020 at almost the same level as it started the year -- at 124.5 million mt Dec. 27, compared with 124.6 million mt on Jan. 5, CEIC data showed.

END-USERS FEEL THE QUALITY

Amid the various medium grade fines including non-mainstream cargoes, there was strong demand for material with higher Fe content.

Brazilian Blend fines, or BRBF, were sold at more than $6/dmt over low alumina indices on a month-plus-one basis. Market sources pointed to BRBF's low alumina and typical 63% Fe grade as ideal for improving production efficiency.

Other medium grade fines with Fe levels above 62% such as Kumba and Khumani attracted interest from end-users that were able to accommodate the higher alkali levels in their blast furnaces.

In the high grade fines segment, the lack of spot seaborne Carajas fines, or IOCJ, resulted in strong portside demand.

Given high coking costs, iron ore fines with high silica levels continued to be discounted. With premiums for mainstream medium grade fines weakening on the back of overall iron ore price strength, sellers were under pressure to widen their discounts for cargoes due to thinning liquidity.

Also in this series:

LOW GRADE DISCOUNTS WIDEN

High coking costs weighed on discounts for low grade fines due to their relatively higher contaminant levels and lower Fe content.

High iron ore prices initially led to monthly term contract discounts for FMG's low grade Super Special fines and Fortescue Blend fines narrowing from 6% to 4% and 3% to 2% respectively in November from October, as weaker steel prices led to end-users cutting costs.

However, a resurgence in steel margins led to a shift away from lower grade fines, with discounts for SSF and FBF widening in December to 7% and 4% respectively, despite surging iron ore prices. Discounts for Indian fines also widened as buyers turned back to mainstream sinter fines.

Trade review: Iron ore | Lump assessments

Lump premiums saw a steady recovery in Q4 on the back of increasingly expensive pellets and the broader preference for higher grade raw materials. For much of Q4, seaborne lump premiums were subdued given minimal lump premiums in the portside market. The push for production efficiency also helped kick-start the greater utilization of lump.

PELLET PREMIUMS GO FROM ZERO TO HERO

Trade review: Iron ore | Platts pellet assessments

Seaborne pellet prices and premiums rebounded in Q4 from a slump in Q3, with the 65% pellet premium hitting a year-to-date high of $44.10/dmt in December and the 64% pellet index an all-time high of $200/dmt CFR China in the month.

The restoration of blast furnace utilization rates in Europe, North Asia and North America took pellet supply away from China, reversing the trend seen earlier in 2020 when all the unwanted pellet supply was diverted to China. There was subsequently little high grade pellet availability, and China premiums bounced back strongly.

India exported fewer pellets as they were needed for domestic steel consumption, particularly as there were delays in accessing mines following mining area auctions.

New production capacity in Southeast Asia, along with end-users restarting operations, was also seen as a demand driver. Market sources expect stronger demand for Indian pellets in Q1 as a replacement for European high-grade pellets, given the lack of spot availability.

CONCENTRATE'S UNUSUAL TREND

One of the more unusual trends seen in Q4 was the spread that emerged between hematite and magnetite sintering concentrate. Magnetite concentrate is mainly used for pelletizing purposes, but the lack of Chinese end-users with pelletizing facilities meant it was used for sintering instead. This resulted in discounts, as magnetite quality is not as good as hematite for sintering.

The impact of high coking costs and discounted valuations for high silica material were evident in the concentrates market, where low contaminant variants from Chile and Peru received high premiums despite their magnetite qualities.

Trade review: Iron ore |  66% domestic Chinese concentrates

China's domestic 66% grade concentrate prices rose by 17% from the previous quarter in Q4, with demand supported by firm steel prices, before starting to weaken in winter due to environmental concerns and operational restrictions.

S&P Global Platts Metals Trade Review: MET COAL| IRON ORE | SCRAP | ALUMINA