Iron ore: Key drivers of near-record prices into 2021

Author Deepali Sharma, Deputy Editor

Seaborne iron ore prices into China remain near nine-year highs more than a year after Covid-19 surfaced in the country.

The Argus 62pc Fe index has averaged $170.26/ dry metric tonne (dmt) month-to-date (20 January), up by 81pc from a year earlier, while the 65pc Fe index month-to-date average was $190.78/dmt, up by 79.5pc on a year previously.

The past year has seen record Chinese demand and extended supply woes for iron ore, as well as a quick rebound in global steel production. Now the coronavirus is re-emerging in north China and starting to show its effect on the ferrous complex.

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We take a look at key factors driving the market. 

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Covid-19  

The impact of the pandemic on the steel-producing raw material turned out to be a supportive one in balance, with the Chinese government rolling out extensive stimulus measures to support its economy that came under the coronavirus’ grip in early 2020. These measures included a $600bn rescue package for the country’s factories and merchants, on top of $300bn for additional fiscal spending and government bond issues. The country issued 1 trillion yuan ($154bn) as anti-virus bonds in the fight against Covid-19. Heading into 2021, a resurfacing of coronavirus cases in China’s steel-producing hub of Hebei has crippled logistics, affecting steel and iron ore deliveries reliant on trucks. Some steel mills in Hebei have brought forward maintenance in response, while others are looking to cut production altogether.  

Mills margins  

As the only major economy expected to post growth in 2020, Chinese mills managed to enjoy positive margins on steel aided by the government stimulus measures. Crude steel production hit a record 1.053bn t last year, resulting in iron ore imports rising to a record 1.17bn t. Steel price increases kept up with rapid cost escalation for raw material prices to keep margins firm. Top producer Brazil’s Vale missed its annual production guidance as expected. But margins have turned negative at Yn100/t for rebar producers in north China ahead of the lunar new year next month, while those in east China are either making no margins or at negative Yn50/t. Gross profits for hot-rolled-coil producers have shrunk to around Yn170/t from over Yn200/t previously. Part of the weakness is down to the colder winter this year, but also the emergence of Covid-19, related transportation curbs and higher coke prices have brought on negative margins quicker. Coke prices have risen by Yn900/t following 14 consecutive rounds of price hikes through late January. The tight coke availability is because of difficult logistics and insufficient capacity replacements following supply-side reforms that started in 2018. The verdict is divided though on whether mills will respond with large-scale production cuts. Two trading participants said that mills will only resort to output cuts should margins stay negative for sustained periods. “The state-owned mills have capacity to even operate at losses so I don’t see widescale production cuts at the moment,” a trader in Singapore said, a sentiment echoed by others. 

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Portside stocks  

Seaborne iron ore stocks are around 124mn t, the same level as this time in 2020 when the market was coming off from a year of severe supply disruptions caused by the suspension of mining activity by Vale following a fatal dam collapse in January 2019. While disruptions of a similar nature failed to occur in 2020, jittery supplies from Brazil throughout the year and from Australia in late 2020 kept Chinese stocks from building up. Supplies of Australian mainstream fines remains around same levels as this time last year. A fire earlier this month at one of Vale’s shipping berths at the Ponta de Madeira port refreshed concerns about Brazilian supplies, although the producer clarified that there is no additional impact because of the fire. IOCJ fines last traded on a fixed price basis at $194.10/dmt on 20 January, maintaining its level even as the other grades receded. The sustained high prices of the brand, despite the 65-62pc spread hitting $25/dmt at both seaborne and portside markets, is because of higher coke costs that make it more attractive for mills to use a combination of IOCJ and low-grade ores in their blast furnaces. Outright prices of low-grade, low-alumina materials such as 58.2pc Fortescue Blend Fines (FBF) have increased. Prices for 56.7pc Super Special Fines (SSF), which has higher alumina, have widened to the widest discount to the PCX 62pc index since August 2020. “The price gap between FB fines and SSF now stands at Yn80/t, wider than the usual Yn45-50/t, underlining the former’s demand owing to its lower alumina content,” a trader in China said.

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Ex-China markets’ impact  

No other major producers can fill Vale’s gap in supplies, but falls in ex-China steel output helped to plug some of the lost iron ore supplies for Chinese mills. China’s non-mainstream iron ore supplies rose by 34pc to 162mn t during January-November 2020, with non-mainstream defined as supplies outside of Brazil, Australia and South Africa. But this month pellet stocks remain at record low at Chinese ports, with demand robust because of higher coke prices. Pellet from Vale and BHP joint venture Samarco has returned to the market this year, with BHP’s share of output at 1mn-2mn t during January-June. A further complication is provided by India where the Supreme Court has sought clarification from the government and pellet exporters on possible evasion of export duties. India is the primary spot pellet seller to China and in 2020 the country’s overall iron ore imports rose by 96pc to China though to November as buyers looked to diversify ore sources. Domestic Indian iron ore supplies have been tight because of mining auctions, the impact of Covid-19 and a resurgence in downstream demand. Falling seaborne Indian supplies have been a key factor supporting pellet prices into China. Portside pellet stocks were 5.6mn t on 22 January, up by 27.5pc from a year earlier but down by 49pc from the record levels in August 2020. 


Breakdown of coking coal and iron ore co-relation  

China’s halt of Australia-origin coking coal imports following a political fallout between Beijing and Canberra has re-established the strong co-relation between cfr China coking coal and iron ore prices. That relationship came under pressure in 2020 as Covid-19 affected the two markets differently. Seaborne iron ore prices exceeded those of coking coal on a cfr basis for the first time in a decade. Entering into 2021, tight coking coal and coke supplies are now supporting prices of high-grade iron ore in China as mills look to limit their use of metallurgical coke. “With steel mills margins coming under pressure, they are hoping coke makers will allow some cuts on their own profits and agree to lower coke prices in the future,” the trader in China said. 

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The spike in seaborne iron ore prices last year led CISA to call for a review of pricing mechanisms, including use of baskets. Argus sets the standard in iron ore transparency with our monthly Argus Iron Ore Index Breakdown report for subscribers, as part of the Argus Ferrous Markets service. For you to have a view of the data that forms the benchmark index, we are pleased to offer you a complimentary copy of this exclusive report.

Our price assessments and market analysis for iron ore, coking coal, ferrous scrap and steel – including four price assessments against which the LME and CME Group settle their benchmark futures contracts – are included in our daily Argus Ferrous Markets service, which supports market participants with contract settlement and indexation, commercial activity and strategic planning.

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