Demand shift sends China iron ore lump premiums soaring
Seaborne iron ore lump premiums have surged by 86pc in the last week, supported by strong demand as Chinese steel output stays high heading into winter and the dwindling supply of low-cost pellet alternatives.
The Argus 62pc iron ore lump premium jumped by 3¢/dry metric tonne unit (dmtu) to 13¢/dmt unit cfr Qingdao yesterday and has almost doubled from 7¢/dmtu a week earlier. The premium is the extra cost for every 1pc Fe in lump over the underlying ICX 62pc fines index. Lump was priced at $146.55/dmt on an outright basis yesterday, while the ICX was at $137/dmt cfr Qingdao.
A Newman Blend Lump (NBL) cargo traded at 14.2¢/dmtu fob basis over a January 62pc fines index on the Corex platform yesterday, accelerating the uptrend.
Chinese port inventories of Indian pellet fell to minimal levels in late November, eliminating a low-cost alternative to Brazilian pellet that makes up the bulk of China's port stocks.
Total lump stocks at six northern China ports have fallen by a third to 11mn-12mn t this week from around 18mn t in mid-November, market participants said. Chinese lump demand rises in winter when pollution restrictions limit fines sintering.
Direct-charge supply tightness is part of an overall shortage in seaborne markets caused by lower Brazilian output and tight supply of steel that is drawing more global capacity back on line.
Brazilian mining firm Vale has cut its 2020 production guidance to 300mn-305mn t. Vale's production had been on pace to exceed 400mn t before it was hit by a January 2019 fatal dam accident, heavy rains and Covid-19 delays.
Blast furnace restarts in Europe and US are diverting iron ore concentrate and pellet supply from China.
"Iron ore lump demand at portside markets has improved as it is more cost-effective now compared with pellet, pushing up lump prices since mid-November," a north China-based mill manager said. Pilbara Blend Lump (PBL) traded at Yn975/wet metric tonne (wmt) yesterday, up by about 7-8pc from Yn900-910/wmt on 16 November, he said.
Soaring flat steel prices are giving iron ore prices margin room to move higher.
But portside lump premiums have lagged seaborne prices. Portside lump premiums on a Yn/wmt basis have followed seaborne trends, but on a Yn/dmt basis have only turned positive this week.
"Traders' speculative demand pushed up seaborne lump premiums along with limited liquidity of lump cargoes in the seaborne market," a Shanghai-based trader said. Mills hold long-term contracts for PBL, limiting supply for spot sales, he said.
"There is at least a Yn100/t loss for landing an iron ore lump cargo at port now, while there is about a Yn20-30/t profit for portside lump sales using earlier import costs," a Tangshan-based mill analyst said. Portside traders usually hedge in derivatives markets to ensure margins, he added.
But some participants are not that optimistic about the outlook for lump premiums.
"Seaborne lump premiums remain much higher than portside lump premiums. I do not think it will go sky high, as the high metallurgical coke price will cap the rise, and there are relatively high stocks at China ports," an east China trader said.
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