Singapore — This is the first of a two-part series looking at how COVID-19 has triggered contrasting fortunes in the global iron ore market due to supply disruptions in Brazil and the divergent pace of demand recovery between China and the rest of the world. Part 2: Ex-China demand downturn hits pellet trade
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China's import boom and a demand slump in the rest of the world have polarized the global iron ore trade in 2020. With Chinese steel margins recovering slightly after the Golden Week earlier in October, the high-to-mid grade iron ore premium looks set to remain firm throughout the fourth quarter, driven by reduced domestic concentrate supply and expensive coke prices in China.
This comes after iron ore prices reached multi-year highs in Q3, driven by resurgent Chinese demand and a Brazilian supply squeeze -- but price spreads between the S&P Global Platts IODEX 62% Fe fines benchmark and other iron ore grades narrowed, indicating a recovery in supply and heightened competition between various grades.
As a result, Chinese steel mills have more economically viable blending options in Q4 than they did earlier in the year to optimize their iron ore burden mix and therefore, steel production costs.
Prices for high- and low-grade fines have converged toward the IODEX benchmark in the second half of 2020. The premium for 65% Fe over the IODEX has narrowed while the discount for 58% Fe relative to the IODEX has been eroded. The performances of the respective iron ore products are down to the supply of product and grades, Chinese steel margins and mills' subsequent blending practices.
Typically, high steel margins raise premiums between high- and mid-grade fines and widen the discount between low- and mid-grade fines, while low steel margins do the opposite. However, Brazilian iron ore exports were at sharply reduced levels over January-May, after supply was disrupted by heavy rainfall early in the year, combined with reduced output from assets placed under care and maintenance following the Brumadinho dam collapse in January 2019.
This bolstered prices for Brazilian high grade Carajás fines, widening the spread between the 65% Fe index and IODEX, despite weaker Chinese steel margins over February-April. Brazil is the most significant source of seaborne low alumina iron ore supply, and high alumina cargoes were heavily discounted as a result. The Platts 58% Fe index, the specifications of which were closely aligned with high-alumina Indian fines before May, was trading at a large discount to the IODEX.
From May, the high-to-mid grade premium fell due to recovering Brazilian supply and a seasonal slowdown in China's construction activity, negatively impacting Chinese steel margins. Growth in China's domestic concentrate production was also rising to fill the gap in seaborne high-grade iron ore supply.
Although Chinese steel margins recovered in July and August, the high-to-mid grade premium continued to fall, weighed down by a recovery in Brazilian exports and lower pellet prices.
The spread between 65% Fe pellet prices and 65% Fe fines fell sharply over February-August as pellet exporters diverted more supply to China following a slump in demand outside of China due to the coronavirus pandemic. China's pellet imports over January-August were already close to the 33 million mt imported over full year 2019.
In theory, 65% Fe pellets should be priced at a premium to 65% Fe fines due to the additional grinding and pelletizing costs of converting fines into pellets. In August, however, the calculated 65% Fe pellet spot price fell below the 65% Fe fines index, exerting downward pressure on the latter.
Australian supply also tightened in July and August, which helped to lift prices for mid-grade fines sharply. This encouraged Chinese mills to adjust their sintering blends in favor of a high and low grade fines combination over the relatively more costly mid-grade products.
S&P Global Platts Metals Trade Review:
- Met coal prices rebound from multi-year lows as Q4 outlook firms
- Soaring iron ore prices bring buying flexibility to the fore
- China's steel winter balancing act to decide Asia's fortunes
- Alumina anticipates calm Q4 after bumpy Jul-Sep
- Ferrous scrap eyes firmer Q4 on steel recovery, slower collection
Helped by recovering demand globally, September saw a rebound in the spread between 65% Fe pellet prices and 65% Fe fines prices, providing headroom for a rise in high-grade fines prices. Supply of low-grade fines also tightened from India due to wet weather, narrowing the low-to-mid grade discount and eroding the cost savings offered by the high-low grade fines blend in sintering.
There has been an improvement in Chinese steel margins since the Golden Week holiday in early October, which has helped to lift the high-to-mid grade premium. S&P Global Market Intelligence expects the premium to remain firm for the rest of the year, with steel margins supported by the prospect of a moderation in Chinese steel production growth and domestic concentrate supply cuts during the winter.
Further support could also stem from high coke prices due to tightness in coal supply in winter and a seasonal slowdown in Brazilian exports following a strong rise in Q3. Conversely, the low-to-mid grade spread could widen amid improved steel margins and ample supply from Australia and India.
Chinese demand has been especially strong for Indian iron ore of up to 58% Fe content to date in 2020 -- Indian iron ore product above 58% Fe is subject to a 30% export duty.
Global iron ore trade has polarized in 2020, with a Chinese import boom offsetting a demand slump in the rest of the world. However in the iron ore pellet market, ex-China demand has carried more sway, with trade and price premiums down sharply.