If anyone is taking stock of the key milestones for the steel sector through its history, they should mark 2021 as the year that made steelmaking curbs in China routine.
Soon after China’s 13th five-year plan for 2016-20 made environmental protections a key focus, curbs to control emissions became commonplace during the October-March winter heating months. This year, China’s steel output hub of Tangshan promulgated the red level pollution alert — the first time since 2017 — and subsequently announced year-long curbs on steelmaking.
These restrictions have had two effects so far:
1. They have pushed steel prices higher.
2. They have provided a further incentive to mills to use higher Fe and lower impurity iron ores to boost productivity.
On 19 April, the spread between the Argus 62pc index (ICX) and the 65pc index widened to $35.15/ dry metric tonne (dmt), the highest in the history of the indexes dating back to 2013, with prices rising across all grades. The following day, the outright index values hit 10-year highs, with ICX at $188.70/dmt, the 65pc index rising to $223.55/dmt and the 58pc index at $165.40/dmt
“The year-long production curbs have created a lot of pressure on low-grade demand. We can see the discount for low/mid grades is widening and expect the high-low grade spread to increase further,” a trader in Singapore said. The slump in lower-grade demand was seen acutely on 15 April when Yandi Fines (YDF), a low Fe and low alumina Australian ore, fetched a floating discount of $7/dmt against a basket of two 62pc indexes, including the Argus ICX. “Liquidity for the lower grades is poor at Chinese ports,” another Singapore-based trader said.
But it is not all gloom for lower-grade ores. There are limits to the impact on ore prices resulting from steel production curbs and steel mills’ drive to ensure profitability.
Tight supply lifts all grades
The iron ore market has not remedied the 100mn t/yr gap in supply resulting from the Brumadinho dam collapse at Brazilian firm Vale’s Corrego do Feijao mine in 2019. Iron ore prices would not be rising to record highs if there was enough slack in the supply chain to allow buyers the luxury of making significant procurement shifts. While steel production curbs have been cited as a factor driving Chinese appetite for higher-grade ores, those curbs are only slowing steel output growth, not reversing it.
The result is that all ores will receive support from the overall growth in steel production. China’s January-March steel output rose by 15.6pc on year to 271.04mn t, while pig iron output rose by 8pc to 220.97mn t. Steel mills’ margins are affecting low-grade demand, but China’s imports of low-grade iron ore will “not see a dent”, with its producers enjoying healthy profits at current prices and mills unlikely to alter volumes under long-term contracts for the year, a Beijing-based trader said.
“As profitability recedes, low-grades will be back in favour,” he said. Stocks of lower-grade Australian iron ore are below levels in 2018 at 15 main Chinese ports, a year that also saw high steel margins comparable with 2021, another Singapore-based trader said. “There are around 4mn t of Indian low-grade ores at Chinese ports, higher than around 2.5mn t in 2018, but overall low-grade stocks are not high,” she said. A private-sector steel mill official said iron ore costs remain a key factor for them in choosing ore grades, even with the high profits of their downstream business. “State-owned mills have a lot of room to accept higher-priced ores, but smaller players like us keep an eye on costs, and discounts for low grades have widened a lot,” he said.
“This year we have maintained our low-grade blend ratio even though there is a wider trend of chasing higher-grade ores,” he said.
Silica-alumina ratio still important
The ore preferences are also a function of mills’ sensitivity to gangue materials and resulting slag in the blast furnace, and the options available to them to maintain optimum alumina-silica ratios. “Some steel mills still prefer using a combination of Pilbara Blend Fines and SSF to maintain optimum silica-alumina ratios in their blast furnaces,” the same Singapore-based trader said, referring to the general high demand for low-alumina Brazilian and domestic Chinese ores amid mills’ productivity drive
In general, Australian ores blend down the higher silica in Brazilian ores, while Brazilian ores blend down the higher alumina and phosphorus in Australian ores. Before the latest bout of lower-grade ore price weakness, low-alumina YDF had often shown that gangue elements can outweigh Fe as the marginal price determinant when YDF is sold through floating basis deals in line with medium-grade ores.
Steel product mix a factor
Recent changes in China’s steel sector have had some repercussions on its iron ore quality requirements, although in a more limited way compared with the effect of high steel margins.
Hot-rolled coil (HRC) prices in China have been at a premium to rebar amid strong demand for vehicles, heavy equipment and household appliances, and given supply constraints resulting from the Tangshan curbs.
Mills have many ways to respond to the HRC-rebar price spread, including diverting production to the more profitable product, another market participant said, implying that the change in iron ore blend is not obvious when downstream products spreads change.
“Low-phosphorus ores may be preferred by flat steel producers, but I don’t see the product spread driving ore choices significantly,” the first Singapore-based trader said. “Mills are chasing Fe units and for this reason YDF prices have fallen more than JMBF. The downstream product spread is not a driver in my view,” a fourth Singapore-based trader said.
Argus assesses more than 250 iron ore, coking coal, steel and ferrous scrap prices in the Argus Ferrous Markets service.
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