China portside iron ore moves to discount to seaborne

Prices of China's portside stocks of imported iron ore slipped to a discount against seaborne fines cargoes in January, as steel mills stepped up purchases of February- and March-delivery cargoes anticipating firm spring-time demand.

An accident at Vale's Feijao mine in Brazil sharpened the portside iron ore discount in the last three trading days of January as higher priced cargoes of BRBF fines and PB fines traded on online platforms.

The Argus PCX 62pc portside fines price was at a discount of $1.68/dry metric tonne to the Argus ICX 62pc seaborne fines price. The PCX price was at a premium to the ICX price in November and December. The seaborne equivalent price of portside fines is calculated by assuming a 16pc value-added tax and 8pc moisture.

An anticipated shortage of seaborne fines may spur mills to book more cargoes of mainstream ores once the market resumes normal operations after the 4-10 February lunar new year holiday, which could further widen the discount for portside ores.

The portside fines discount emerged in January despite a firmer yuan versus the US dollar, which inflated the value of yuan-denominated cargoes in dollar terms. The dollar weakened by 2.6pc against the yuan last month.

Among the key portside brands tracked by Argus, BRBF fines widened its premium to the Argus PCX price in yuan terms to 3.31pc in January from a 1.3pc premium in December. There could be significant upside to the BRBF premium as supplies are likely to come under strain after Vale announced a halt to production of 40mn t/yr of southern system fines that are blended with IOCJ fines to produce BRBF fines in China and Malaysia. Vale has around 30mn t of iron ore inventories in China and Malaysia, which should alleviate any short-term supply stress, according to investment bank Goldman Sachs, although there are no estimates on how much of it is BRBF or may be blended to produce BRBF fines.

Qingdao-traded PB fines widened its discount to the Argus PCX price to 0.9pc in January from 0.7pc in December, while Caofeidian-traded PB fines was flat to the PCX price last month. Newman fines premium to the PCX price was stable at 2pc.

SSF fines narrowed its discount to the PCX price to 30pc in January from 36pc in December. The sharp contraction points to a higher use of low-grade ores by Chinese mills that are seeking to save costs amid slender profit margins. Use of Fortescue's low-grade ores such as SSF fines and blended fines is expected to remain robust as a shortage of mainstream medium-grade fines is likely after Vale's Feijao accident.