Buying shift to widen lower Fe iron ore differentials

Discounts for lower Fe iron ore fines are widening from 15-month lows in October, as demand slows with a recovery in Chinese steel margins and an emphasis on conserving metallurgical coke.

The 58pc fines index fell below an 8pc discount to the Argus ICX 62pc index last month, its smallest gap since July 2019. The 58pc-62pc differential has since widened to 9.4pc. Australian mining firm Fortescue Metals' Super Special Fines (SSF) narrowed its portside discount to 73 yuan/wet metric tonne (wmt) ($11/wmt), or 8.5pc, below Pilbara Blend Fines (PBF) in mid-October on a free-on-truck Qingdao basis. This differential widened to Yn115/wmt, or 13.2pc, yesterday.

"The spreads between low-grade and medium-grade are widening," a Beijing trader said. "The main reasons are high coke prices and improved profits. We reckon the gap will keep widening in the near term,"

Low-grade iron ore fines such as SSF and Indian fines have lost much of their price advantages with the narrowing of their discounts to higher Fe ores.

Jindal Steel and Power offered a cargo of 57pc Indian fines last week at a discount of 16pc to a 62pc index, or roughly $94/dry metric tonne (dmt) based on swaps, said an Indian mining firm official that pegged the tradeable level at $87/dmt. Another offer for Indian fines was at $89/dmt. Indian fines had been offered at a 14pc discount on 27 October and at a $16.50/dmt discount to a 62pc index on 2 November.

"Low-grade Indian fines are not that hot with mills' better profits and sufficient supply of medium grades," an Indian mining firm official said.

The shift away from lower Fe ores has come as rising port inventories and import arrivals have given Chinese steel producers more flexibility on ore blending.

Port stocks for medium-grade Indian fines and Brazilian Blend Fines (BRBF) are relatively high. BRBF premiums have been under pressure from increased arrivals that have erased its portside premium to PBF of Yn35/wmt, or 4pc, on 21 October to a discount yesterday of Yn1/wmt, or 0.1pc. Some mills are increasing the ratio of BRBF in sintering blends.

The recovery in mills' profit margins has been driven by the drop in seaborne iron ore prices from six-year highs in September and an increase in steel prices since late October.

"Our gross margin for rebar has rebounded to around Yn150-200/t now from Yn100-150/t in early September," a Hebei-based mill manager said. "Our hot-rolled coil margins have recovered to Yn300/t recently with the steel market buoyed by the unexpected warmer winter and longer construction period," a Shandong-based mill buyer said.

Tight domestic met coke supplies has led mills to increase the Fe content in blast furnaces to reduce coke use. This has also increased pellet demand.

"We slightly increased pellet ratio by cutting lump use, in order to reduce the coke consumption. We also heard some mills are inclined to buy iron ore with lower silica content, such as Russian and PMC concentrates that are coke-saving too," a north China mill buyer said.

By Chris Newman, Kitty Xie and China staff

SSF differential to PBF (%)