Iron ore differentials narrow on supply pressure

Portside discounts for Fortescue Metals' 56.5pc Fe super-special fines (SSF) have dropped below 20pc to the Argus 62pc PCX portside index on 15 February, the narrowest in recent months, and may contract further as supply keeps high-grade prices under pressure.

The Argus-assessed, yuan-based SSF fines has narrowed its discount to the Argus PCX 62pc portside fines to 22pc in February, from 30pc in January, 36pc in December and 38pc in November.

The premium for high-grade ores is also likely to be pressured with mills increasing offtake of low-grade ores such as SSF fines in response to low mill margins and lost Brazilian supply.

Brazilian mining company Vale could increase supplies of 65pc basis IOCJ fines to make up for the loss of volumes at its southern system mines.

The premium for the Argus 65pc price assessment to the Argus 62pc ICX index price has halved from last year, staying below 20pc for all but one day since late December, compared with premiums of 28-45pc in May-October.

The narrowing of the price differentials between the 62pc, 58pc and 65pc Fe grades is likely to continue as the value for higher-priced materials has been eroded by mills making profit margins of around 100-450 yuan/t ($15-67/t) compared with over Yn1,000/t ($148) from January to early-November.

There was a structural shift away from lower-grade to higher-grade ores last year, which was partly reflected in China's lower iron ore imports despite higher crude steel output. But with the squeeze in profit margins, mills are buying more mainstream low-grade ores that allow them to largely control the level of impurities generated by the steelmaking process, while accepting lower iron content.

Productivity is less likely to be a focus for Chinese steel mills if profit margins continue to remain depressed, with mills' attention turning towards saving costs. Profits remaining low in the near term is a distinct possibility, with the Chinese economy and real estate market widely expected to slow this year.

In the high-grade category, the Vale mining accident on 25 January is likely to leave the producer short of over 50mn t iron ore output this year. But it can make up for this by increasing output of 65pc IOCJ fines, which has not seen any impact to production.

Pushing additional IOCJ fines volumes into the seaborne market amid sluggish Chinese demand could further narrow price differentials between the 62pc and 65pc fines grades.

But Vale's medium-grade BRBF fines may expand its premium to the 62pc basis index as a shortage of southern system fines will almost certainly squeeze the supply of BRBF, which is a blend of IOCJ fines and high-silica fines such as SSFG and SSFT.

The Argus-assessed yuan-based BRBF fines price was at a 4pc premium to the Argus PCX price this month, compared with a 3.31pc premium in January and a 1.3pc premium in December. BRBF fines prices were at around a 12pc premium to the ICX price in July as mills demanded more low-alumina ores, although this tapered off after mill profits crashed in November.

Iron ore price differentials to 62pc indexes %