Iron ore diversions to China risk a surplus

China's quick recovery from the Covid-19 outbreak has steadied iron ore prices this year, but global steel production cuts could divert 4mn-5mn t/month of iron ore to China and start to weigh on its spot markets, especially for pellet.

The Argus ICX 62pc iron ore fines index has ranged between $80-90/dry metric tonne (dmt) cfr Qingdao this year, down by nearly 9pc to $83.20/dmt since 1 January. Lingering supply tightness has also steadied iron ore.

Supply shocks last year included Brazil's fatal Feijao dam incident and heavy rainfall that slowed Brazilian mining firm Vale's iron ore production down by 9.6pc, or 83mn t, to 302mn t in 2019. Wet weather also slowed Australian shipments.

Australian mining firm BHP gave an upbeat iron ore outlook yesterday based on robust Chinese demand and supply disruptions, although it acknowledged sharply lower demand for raw materials [in the US, Europe and India.

Chinese market participants are turning their attention toward the weaker demand, saying the impact of global steel production cuts and the resulting shift in iron ore supplies has not been reflected in the market yet.

South Korea and Japan are already diverting 3.5mn t/month of iron ore to China, said a Beijing-based steel mill trader. The market has been optimistic about Chinese steel and iron ore demand, but it might be underestimating the extent of global steel production cuts and resulting diversions, he said.

Vale earlier this week cut its 2020 production guidance by as much as 31mn t of fines and pellet. But these cuts were already reflected in its January-March production, down by 18pc from a year earlier, participants said.

Iron ore fines markets may start to come under more pressure from Japanese steel producers' spot sales of iron ore into China, a Singapore-based trader said. A Japanese mill yesterday sold 200,000t of 65pc Fe IOCJ at $99/t cfr China to a Chinese trading firm in a tender. Japanese mills have sold at least six cargoes of fines to China this month, participants said.

Japan's crude steel output fell to a 10-year low in its 2019-20 fiscal year to 31 March, with April-June production projected to fall by another 26pc against the previous year.

Europe could send an estimated 500,000-600,000 t/month of high-grade Atlantic pellet to China after EU steel producers announced cuts to about 20pc of their 87mn t/yr hot metal production by late March. India, a key pellet exporter, saw its steel demand forecast revised sharply lower.

The increased pellet supplies have so far been contained to pellet markets, a Shanghai-based trader said. Spot markets for iron ore fines will not be affected that much from European pellet because of lingering supply tightness, he said. "We feel that mills' buying interest is strong recently, so in our opinion, 62pc prices will be stable, and if miners cut more, prices will go up."

The Argus 64pc Fe, 3pc Al pellet index has fallen by $14.50/dmt to $100.50/dmt over the past month, while the ICX and 65pc Fe fines indexes are marginally flat from a month ago. Floating premiums for concentrate have also been steady.

The estimated diversions of 3.5mn t of fines and 500,000-600,000t of pellet are close to earlier forecasts. Europe, Japan and South Korea imported about 300mn t of iron ore in 2019, about 20pc of seaborne supplies, US bank Morgan Stanley said. China imports 1bn t/yr.

Steel production amid the 2007-08 global financial crisis fell by 30pc in Europe, 26pc in Japan and 9pc in South Korea, prompting them to cut iron ore imports by 109mn t, or 32pc, in 2009, the bank said. These levels of cuts could send 15mn t of iron ore to China from Europe and Japan this quarter, it forecast.

By Chris Newman, Kitty Xie and China staff