China portside iron ore discount expands in August

China's portside prices of mainstream medium-grade iron ore fines expanded their discount to seaborne fines in August, as slower steel demand last month curbed purchases in yuan-based portside markets. A weaker yuan against the US dollar also contributed to the widening of the discount.

The yuan was largely stable against the dollar in August at above 6.80 to the dollar — a much lower level than rates seen most of this year. The yuan hit a six-month high of 6.88 against the dollar on 17 August. The weaker yuan has also curbed profit margins for yuan-based iron ore sales, with several cargoes even sold at a loss.

The Argus PCX 62pc portside fines price was at a discount of $4.02/dry metric tonne (dmt) to the Argus ICX 62pc seaborne fines price, the widest discount since PCX started publishing in September 2017. The PCX-ICX price discount was at $3.69/dmt in July.

The seaborne-equivalent of Argus PCX price is calculated by assuming a 16pc value-added tax and 8pc moisture for fines cargoes. The Argus PCX average price fell by 1pc on-month in September to 484 yuan/wet metric tonne (wmt).

Portside prices may see a rebound this month, with steel demand likely to get a seasonal boost in September and October. But there are no signs yet of rapid iron ore restocking by mills and traders like what was seen in the first quarter of 2018. The price differential between the PCX and ICX prices may not significantly shrink as long as the yuan remains above 6.80 to the dollar.

Some traders have reported an improvement on profit margins on sales of PB fines at Tangshan and Shandong ports in the past four to five days. "There is a slight profit margin for selling PB fines at Tangshan ports now, while the loss on selling PB fines at Shandong has narrowed to Yn10-20/wmt from Yn20-25/wmt," said a north China-based trader.

The improvement in prices and demand have encouraged portside traders to offer fewer discounts to buyers, although it has not yet increased these traders' demand for seaborne cargo.

Among the major brands tracked by Argus in the portside market, the premium of yuan-denominated BRBF fines to the Argus PCX narrowed to 10.62pc in August compared with 11.92pc in July. Chinese mills have likely slowed purchases of BRBF fines to some extent amid a sharp increase in prices over the past few months. Some mills have reported increasing the blend of domestic concentrate with Australian medium-grade fines to reduce usage of BRBF fines and IOCJ fines.

But demand for BRBF fines remains quite robust in portside and seaborne markets and are likely to stay well supported in the near term, as mills seek to maintain high productivity rates amid sintering restrictions in cities like Tangshan.

Qingdao-traded PB fines cargoes were at a discount of 0.8pc to the PCX price, largely stable from a 0.9pc discount in July. But Caofeidian-traded PB fines were at a 3pc premium to the PCX price compared with trading flat to the PCX in July. Tighter supply of PB fines at Tangshan ports, such as Jingtang and Caofeidian, has lifted the price differential between Shandong and Tangshan ports to Yn25-30/wmt over the past several days.

Newman fines differential to the PCX price was unchanged at 3pc, while SSF fines was at a discount of 38pc compared with 39pc in July.