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China portside iron ore narrows discount to seaborne

06 Feb 2018 08:32 GMT
China portside iron ore narrows discount to seaborne

Singapore, 6 February (Argus) — The portside discount to seaborne prices of imported iron ore in China has narrowed over the last couple of weeks as sales pick up in portside markets ahead of the lunar new year holiday.

The discount of the Argus PCX 62pc portside price to the Argus ICX 62pc seaborne price on a dollar equivalent basis has not been wider than $1.30/t since 22 January. The discount stayed in the $1.70-4.50/t range for most days from 8 December to 21 January, except on 18 January when it hit 55¢/t, indicating a pronounced preference for seaborne cargoes.

The PCX discount to ICX has mostly ranged from $0.10-1.30/t since 22 January. But the PCX was at a premium to the ICX on three days — 29 January, 1 February and 2 February — for the first time since 7 December.

The dollar-equivalent of the yuan-denominated Argus PCX is calculated by assuming a 17pc value-added tax and 8pc moisture for mainstream fines cargoes.

Chinese mills and traders carried out unprecedented restocking in the seaborne market through December and most of January, swelling mills' stocks to 30-60 days against average levels of 25-27 days.

China's portside iron ore stocks rose to a record high of 152mn t on 31 January, up by 3.6pc on the month and 27pc from a year earlier.

Restocking has largely been driven by expectations of a sharp spike in iron ore demand after the lunar new year holidays, when construction activity across China resumes after the winter lull. And mills are expected to resume normal production across 28 cities on 15 March after winter output restrictions end, which is likely to boost iron ore use. Steel mills have made profits of Yn700-1,000/t through the winter slack season, which is historically quite high but down on levels of Yn2,000/t in early December. Analysts expect the steel sector to remain profitable, at least in the short term, which should support iron ore prices in seaborne and portside markets.

But mill buying has shifted to the portside market as the lunar new year approaches. Mills that are still buying iron ore need the supplies to run operations during the 15-21 February holidays, when iron ore trading in China nearly comes to a halt. Truckers are likely to start leaving for their hometowns early next week, leaving scant transport available for hauling even portside ore to mills. It also becomes a challenge for importers to complete letters of credit and other formalities for seaborne ore before the holiday begins.

The portside differential to seaborne prices is also being narrowed by a strengthening of the yuan against the dollar by 0.84pc since 22 January. A stronger yuan partially insulates portside sellers against increases in dollar-denominated import prices.