Iron ore lump premium in China falls as demand falters

Premiums for iron ore lump fell sharply last week in line with decreasing demand in China and falling mills' margins.

Argus assessed lump premiums at 57.7¢/dry metric tonne unit (dmtu) on 9 July, down by 19.9pc from 72¢/dmtu on 1 July. The premium, which captures the top-up over an underlying 62pc fines index, has remained above 70¢/dmtu since mid-June on strong demand in and outside China. Lump premiums were supported earlier in the year on tighter availability of mainstream cargoes and higher coke prices. Sintering curbs at China's steel production hub Tangshan further supported demand.

Expectations of steel production cutbacks in China in July-December have dragged on demand for high-quality iron ore, including lump. Cuts in the second half of the year are not just aimed at sintering operations but also target blast furnaces. Expectations of cuts are based on China's target to keep its annual steel output below or around last year's levels.

"Steel mills are not eager to maximise productivity in the second half of the year and may even need to reduce production," a north China mill manager said. Demand for higher quality and higher-priced ores has taken a hit because of the narrowing mills' margins.

"Our lumps ratio has decreased from 5-6pc two months earlier to 2pc now. We have also shifted from higher grade lumps to lower grades," a south China mill manager said.

"Our current iron ore lump use ratio is 3-4pc compared with about 9pc earlier this year. In March-April, we increased the usage of non-mainstream iron ore lumps to replace mainstream lumps to ensure high production and save costs. Now we have gradually reduced the lump ratio to further reduce costs given the lower steel margins," a Shandong mill manager said.

Portside iron ore lump stocks have been on the rise since late June and reached 18.45mn t by 8 July, sources said. Lump premiums at the portside market has fallen by 13.3pc from 1 July to 61.27¢/dmtu, according to Argus assessment.

Some mills have also recently offered long-term contract seaborne iron ore cargoes because of production cuts, adding to supply.

The decline in premiums at Shandong port was slow though on limited availability. Pilbara Blend Lump (PBL) and Newman Blend Lump (NBL) stocks stood around 450,000t at Shandong last week, down by 34pc from late June, a north China mill buyer said.

The aggressive short selling in the paper market has also lowered lump premiums, a Singapore trader said.

Australian iron ore lump supplies are expected to increase as new mines enter production. BHP's South Flank mine in the Pilbara region of Western Australia began production in May while Rio Tinto's 43mn t/yr Gudai-Darri iron ore mine in the Pilbara is scheduled to start operating in early 2022.

By Kitty Xie

Lump premium seaborne, portside