Chinese steel mills have so far not stepped up stocking of iron ore, despite concerns about a supply crunch persisting over the next few months on the back of moderate profit levels and elevated iron ore prices.
An Argus survey of 13 steel mills last week put average stocks at mills at 20.88 days of usage, marginally higher than a survey of 19 mills on 20 February that put stocks at around 20.52 days.
The Argus ICX 62pc price index has gained by around 43pc since the end of 2018 on the back of supply concerns in Brazil and Australia. The Argus ICX breached a high of $100/dry metric tonne (dmt) earlier this month after a gap of five years. Prices started to move higher in February, after a 25 January tailings dam accident at Vale's Feijao mine. Cyclone Veronica in Australia in late March and a fire at Rio Tinto's Cape Lambert port facility in April further pressured iron supplies.
Mills' gross profit margins are currently around 500 yuan/t ($72.52/t), around half of the profit levels during most of 2018. Higher prices of met coke and iron ore have slowed the expansion of mill margins this month, despite higher steel demand and prices. Mills have relied on portside markets to buy smaller lots for immediate requirements, with seaborne spot trade volumes still quite muted. Portside iron ore stocks have dropped rapidly this month, according to third-party sources, to below 130mn t compared with 147mn t on 31 March.
"We are relying mostly on our long-term contracted cargoes as spot iron ore prices are so high. We are not bidding on even miners' tenders, so our mill stocks have fallen a bit," said the manager of a mid-sized Hebei-based mill.
"Our profit margin for rebar has narrowed to Yn300-400/t, so there is no reason for us to stock more high-priced cargoes," said the manager of an east China-based mill. But inventories at Yangtze river ports, where the mill usually buys stocks, are quite tight, forcing it to seek seaborne cargoes. Some mills in the province are looking to tinker with the furnace burden to lower costs, such as using more domestic pellet to cut back on imported lump.
High-grade iron ore stocks are quite tight at the major ports of Hebei and Shandong provinces. Arrivals of PB fines cargoes are expected to remain tight at least for the next month and maybe even in July, while supply of Newman fines may also be tight in July. Availability of Vale's BRBF fines and IOCJ fines will continue to remain tight in the near term.
"Our iron ore inventories dropped to about 15 days from more than 20 days previously. We need to control our costs at current profit levels. The critical point will come if portside stocks slip below 100mn t," said the manager of a mid-sized north China-based mill, who expected further upside to prices of mainstream grades such as PB fines.
Steel mills are concerned about low iron ore stocks at ports but with the rainy season arriving, steel demand is due for a seasonal correction, which will squeeze profit margins even further – so it is hard for mills to increase ore stocks, said the manager of a Yangtze delta-based mill, which is carrying 25 days of iron ore stocks. Hot and wet weather seasonally slows construction activity and pressures steel demand in the summer months.
Some smaller mills in north China have stocks of around seven to 10 days as mills close to the coast are usually assured of iron ore availability compared with inland mills, which tend to build up stocks. An inland mill in south China has built up stocks of 75 days of iron ore use, compared with 60 days previously, as the supply crunch has caused concerns about the smooth running of operations.
Survey of mills:
- Hebei-based mid-sized mill: 30 days of stocks
- Hebei-based small mill: 10 days of stocks
- East China large mill: 25 days of inventories
- Shandong-based large mill: 27.5 days of stocks
- Small Hebei-based mill: 7 days of stocks
- Mid-sized south China-based mill: 75 days of stocks
- Yangtze delta-based large mill: 25 days of inventories
- Yangtze delta-based large mill: 27.5 days of stocks
- Shandong-based large mill: 25 days of inventories
- Mid-sized Hebei-based mill: 15 days of stocks
- Large Jiangsu-based mill: 25 days of inventories
- North China-based small mill: 12.5 days of stocks
- Mid-sized Jiangsu-based mill: 25 days of stocks
