Lower margins across Chinese steel mills following the decline in downstream prices have fuelled interest among buyers for lower grade iron ores, though widespread changes in feedstock blends away from the higher grades have yet to materialise.
Margins have narrowed from over 1,000 yuan/t ($156) in early May. For rebar producers, margins narrowed from Yn1,100-1,200/t in early May to Yn100-300 towards the end of the month while margins across hot-rolled coil (HRC) makers shrank from Yn1,500-1,600/t to Yn400-500/t. The weaker margins have occurred on lower downstream prices following the Chinese government's focus on the recent spike in commodity prices. The Argus domestic China HRC price rose to Yn6,750/t on 12 May, but dropped by 19pc to Yn5,450/t by 28 May. Rebar prices decreased by 20pc from Yn6,050/t on 12 May to Yn4,820/t by 28 May. In the same period, the Argus 62pc index shed 19.5pc to drop from a historic high of $235.55/dmt on 12 May to $189.40/dmt by 28 May.
"HRC gross profits stand at around Yn400-500/t in north China and Yn200-300/t in east China, down from Yn800-1,000/t two weeks ago and from Yn1,500-1,600/t in the first half of May," a Shanghai-based trader said last week.
"Our HRC gross profits are at Yn400/t while rebar profits stand at Yn300/t, down by Yn800-1,000/t from mid-May," a north China mill manager said.
"Our overall steel profits have dropped from Yn1,000/t levels. Wire rod profits stand at Yn300/t while medium plate profits are at Yn450/t," a Hebei steel mill manager said. "Some mills in south China are operating at breakeven points while some rebar producers are operating at a loss," he added.
Rebar profits in north China are Yn150-200/t higher than for mills in east China as year-long production restrictions at Tangshan tightened rebar supply in the region at a time of strong construction steel demand, according to a north China trader.
The thinning steel margins have encouraged some mills to buy more lower grade ores, there have not been significant adjustments to the sintering blends.
"Medium and small-size mills gravitated towards cheaper, lower grade ores when their margins dropped below Yn500/t," a north China steel mill manager said. "Our flat steel margins are around Yn100/t and we recently bought some Indian fines as a result," he added.
Portside trading of brands such as Super Special Fines (SSF), Fortescue Blended fines (FBF), Yandi Fines (YDF) and Indian fines picked up recently as cost consciousness across mills grew. Demand for medium-grade fines such as Pilbara Blend Fines (PBF) and Newman High Grade Fines (NHGF) remained firm while that for the high-grade Iron Ore Carajas (IOCJ) slipped, a Shanghai-based trader said.
Market sources also pointed at supply tightness as a factor supporting prices for the higher grades. "Shipments loaded in late-May from Rio Tinto, BHP and Vale show a lower percentage to the Chinese market compared with a year ago, likely due to improving ex-China demand," a Singapore-based trader said. Brazil's iron ore exports to China rose by 10pc on year to 16.49mn t in May, Brazilian customs data showed. Volumes increased by 4.43pc on the month.
The four largest Western Australia producers — Rio Tinto, BHP, Fortescue Metals and Roy Hill — loaded vessels with a combined 17.09mn deadweight tonnes (dwt) of capacity in the week of 29 May, down from 17.93mn dwt in the week ending 22 May. The miners loaded vessels with a combined 16.57mn dwt of capacity in the 5 June week. The deadweight tonnage is the maximum capacity of the vessel and overestimates actual shipments by around 5pc.
Mills' focus on costs is reflected in the narrowing spread between the Argus 65pc and 62pc indices. The spread stood at $30.45/dmt on 3 June, smaller than $37.45/dmt on 25 May and below a two-year high at $38.10/dmt on 5 May.
"IOCJ demand may be dented if steel mills' margins continue to be eroded," a south China trader said, adding he expects a pickup in lower grade demand towards the second half of the month.
China's construction activity typically slows in summer, and this week some construction sites in Shanghai have suspended operations during the 7-9 June national college entrance examinations. HRC prices in China dropped by Yn80/t on 7 June on slower demand into the traditional slack season.
"That said, bigger steel mills are unlikely to change their ore blend as margins have narrowed but they remain positive for many," the trader said.
Market participants are awaiting clarity on further steel production cut announcements, following calls by the country's ministry and industry and information technology to keep yearly steel output gains in check.
