Deteriorating steel margins have forced Chinese steel mills to shift iron ore blends to reduce costs, narrowing the differentials for lower Fe and higher Fe ores to 62pc indexes.
Mills are using 63-65pc Brazilian fines blended with sub-60pc Fe fines to use less mainstream 62pc fines. Iron ore prices near six-year highs have pushed some mill margins negative.
Mills began considering this strategy two months ago and prices have responded by the shift in use. The main effect has been a narrowing of discounts for sub-60pc Fe fines such as Super Special Fines (SSF), Indian fines and Yandi Fines (YDF).
Prices for mainstream 62pc fines have fallen faster than prices for lower Fe ores as "dwindling mills' margin has ticked up the interest of using more low-grade fines". a Beijing-based trader said.
The SSF portside discount to the Argus PCX 62pc portside fines index has halved on an outright basis at Yn72/wmt on 29 September from Yn143/wmt on 1 September. SSF's discount on a percentage basis dipped below 10pc in late September from more than 20pc in August.
YDF flipped from a floating discount in late August to a premium by late September, trading at $2.10/dmt below 62pc index on 21 August, a premium of 50¢/dmt on 9 September and a premium of $2.10/dmt on 29 September.
Brazilian Blend Fines (BRBF) portside free-on-truck basis prices regained a premium to the PCX, rising above 5pc in late September before settling around 2pc above the PCX, up from almost flat in late August.
"The limited tradeable volumes and cargoes concentrated by a few sellers have helped support recent BRBF prices," a Singapore-based trader said. BRBF's lower alumina is not its main draw as buyers prefer to use low-alumina YDF that is lower cost, he said.
The 60.5pc Fe Jimblebar Blend Fines has become one of the more favoured medium-grade fines because of its discount to other 62pc fines. Its seaborne floating discount narrowed from $2.70/dmt below 62pc index on 21 September to $1.35/dmt on 29 September.
Indian fines have also seen increased demand.
The portside premium for Pilbara Blend Fines (PBF) in contrast narrowed in the second half of September. The seaborne floating premium fell from around $4.50/dmt on 9 September to $3/dmt on 30 September. Portside prices for PBF fell sharply from the Yn950/wmt in mid-September to Yn880/wmt by 24 September, then held steady into China's 1-8 October national day holiday.
The 65pc index briefly had its 10pc premium to the ICX cut to 6pc in mid-August before rebounding back around 10pc in September. This strength has limited the cost savings of the blended strategy.
A 62pc basis blended price of the 58pc and 65pc seaborne indexes has been priced at a premium to the ICX 62pc index since 9 September, indicating that the shift away from mainstream 62pc fines has outlived its benefit.
"Medium-grade fines have actually become better value than a combination of high-grade fines blended with low-grade fines since around 9-10 September, yet steel mills continued to chase up the low-grade fines demand for the margins and reducing the costs," a Hebei-based steel mill manager said. "We have not seen much feed blend conversion back to medium-grade fines yet."
