Iron ore premiums fall on supply gains, demand cuts

Market: Metals
02/08/19

Spot iron ore premiums have fallen over the past month, pressured by a recovery in Brazilian shipments and north China's steel output cuts.

The largest falls have been for Yandi fines, which held floating premiums of more than $5/dry metric tonne (dmt) a month ago, now selling at a discount to index, and lump premiums that have been halved.

UK-Australian mining firm BHP's 57pc Fe Yandi fines, favoured by mills for its low alumina content, sold at floating premiums of $4.05/dmt and $5.15/dmt above the 62pc index in early July and around $4/dmt mid-month, before plummeting to premiums of $0.51/dmt and $1/dmt in deals 25 July, then trading flat to index on 29 July and at a negative 50¢/dmt on 30 July.

China's increased output of low-alumina concentrate and stricter output restrictions in July in Tangshan and its extension of eased restrictions in August have reduced demand for iron ore imports, especially low-alumina ores that had been in shortage after a tailings dam collapse cut 100mn t/yr of production guidance from Brazilian mining firm Vale.

Vale's low-alumina 63pc Fe BRBF has seen its floating premiums narrow from as high as $6.20/dmt to a low-alumina 62pc index in early July to $5.30-5.60/dmt in mid- and late July. Vale's partial restart of Vargem Grande that will add 5mn t of BRBF in 2019 accelerated the falls. BRBF cargoes sold at a $3.60/dmt premiums yesterday and today.

UK-Australian mining firm Rio Tinto's PB fines traded at premiums of $5.10/dmt to $5.80/dmt in early and mid-July. A PB fines cargo sold at a $4/dmt premium on 24 July. Then in a private deal yesterday a late August laycan cargo traded at $3.80/dmt, the first time below $4/dmt since mid-June.

A PB fines tender closed at a $4.51/dmt premium to September index today, but Chinese traders said mining firm-sold cargoes go for at least 30-50¢/dmt above what they can achieve.

"I think the premiums may fall further when the seaborne buying interest is kept low and mills choose to run on quite low iron ore inventory levels," an east China-based trader said. Lower profit margins and weaker steel prices and a gloomy economy outlook are outweighing any demand support from the slightly loosened August output restrictions.

Demand for direct-charge ores that do not require sintering have fallen to levels more in line with the cost of sintering fines. The Argus 62pc lump premium rose to a two-year high of 41.5¢/dmt unit (dmtu) cfr Qingdao on 2 July, but in mid-July fell below 25¢/dmtu and yesterday was at 20.4¢/dmtu. Lump premiums are for every 1pc of Fe unit. Eased sintering restrictions in August and increased use of pellet made from domestic concentrate allowed buyers to reduce lump use.

Newman, Mac and Jimblebar fines have also seen floating premiums narrow. Mac fines sold at premiums of $3.60/dmt and $3.90/dmt in early July, at between $1-1.51/dmt in mid- to late July and then at 80¢/dmt and 40¢/dmt last week.

Jimblebar fines discounts to 62pc index widened after its typical specification fell to 59.5pc Fe from 15 July from a previous 61pc Fe to a $4/dmt discount at the end of July from discounts of $1.75/dmt and $2/dmt on 18 July. A September delivery sold at a $3.50/dmt discount to October index, equal to around an $8/dmt discount if using September index.

Steel mills are seeking to cut costs by blending 65pc Fe IOCJ with lower grade ores like SP10, Jimblebar fines and even Indian fines, and blending domestic concentrate with non-mainstream fines to reduce use of PB fines.

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