High steel margins magnify impact of changing iron ore specifications
Recent specification changes for some iron ore grades are having a pronounced effect on buying preferences as mills in China look to capitalize on recent high steel margins by maximizing production.
Rallying steel prices and high production margins in November have spurred mills to improve efficiencies by increasing their utilization of higher grade fines. Prior to November, lower grade fines were more sought after to lower production costs as steel margins were thin and efficiency was less of a priority.
Steel margins have seen a resurgence in late November, with hot-rolled coil or HRC margins widening to Yuan 200-300/mt and long products to Yuan 400-800/mt. In June-July, the margins moved between a slight loss and Yuan 50/mt for HRC and Yuan 50-100 Yuan/mt for long products as iron ore prices surged past $100/dmt CFR China.
The most liquid iron ore product in the spot market, Rio Tinto’s Pilbara Blend Fines or PBF, has long been the mainstay for Chinese blast furnaces due to its consistency in specifications and wide availability in the spot market.
Even at similar overall price levels, the use of PBF is more cost-effective than a high grade-low grade blend once prevailing coking costs are factored in, a Chinese trader said. In addition, available high grade and low grade fines are unlikely to have the same specification consistency as PBF, which may lead to frequent changes to the blast furnace production process, the source added.
Market sources have seen increased utilization of PBF in November as end-users seek to streamline their sinter feed to ensure minimal disruption to their steelmaking process. When iron ore prices climbed above $100/dmt CFR China mid-year, crimping steel margins, they were more actively seeking alternative medium and low grade fines instead of PBF to lower fixed production costs.
Sources at several Chinese mills this week said they have been slowly increasing the ratio of PBF in their blast furnace while reducing that of low grade fines to increase production rates.
While higher levels of contaminants have recently emerged in some iron ore grades from older Australian mines, the difference between PBF’s actual and typical specifications remains limited as it is typically blended from ores from numerous mines, market sources said.
“Although higher phosphorus segments of certain mines have been reached, Rio Tinto has been able to separate out certain sub-products from their final PBF blend and sell them separately, maintaining consistency in their specifications,” a source said.
In contrast, BHP has lowered the Fe level of its Jimblebar Fines, or JBF to 59.5% from 61% and for its Mining Area C Fines or MACF to 60.8% from 61% since July. As a result, fourth quarter term contract discounts for BHP’s JBF widened to 5.5% from 0.5% for its previous 60.3% specifications, while for MACF remained flat. The term discount for JBF further widened to 11.5% for December loading cargoes as demand weakened for high impurity iron ore.
In the spot market, Newman Fines or NMF premiums to the front month IODEX was wider than for PBF. On Thursday, the premium of 62% Fe PBF to front month IODEX was $1.05/dmt CFR China and for NMF was 25 cents/dmt, indicating a spread of 80 cents/dmt on a 62% Fe basis. On October 1, the two premiums were assessed at $4.95/dmt and $4.55/dmt respectively on the same basis, indicating a much narrower spread of 45 cents/dmt.
The fixed price differential for 61% Fe PBF was assessed Thursday at a discount of $1.50/dmt to 62% Fe IODEX, 62.4% Fe NMF at a discount of 35 cents/dmt to the same marker, MACF at a discount of $4.05/dmt and JBF at a discount of $13.05/dmt.
A month earlier on October 30, the discount for PBF was at the same level and the NMF discount at flat, while the MACF discount was $3.95/dmt and JBF discount at $10.65/dmt.
The discounts for the other grades was in contrast to the steady spread for PBF, which indicates weakening demand for the other Australian medium grade fines in comparison to PBF.
DRY PROCESSING, HIGHER SILICA
In Brazil, a shift to dry processing from wet processing following the Vale dam disaster in January has led to higher silica levels in south Brazilian iron ore products, amid higher prices for coke in November.
As a result, Chinese demand for Brazilian medium grade fines has centered on Brazilian Blend fines or BRBF, with its typical silica level of 5% ideal for most Chinese blast furnaces. Non-mainstream Brazilian medium grade fines have silica levels of 7%-8% or higher and Chinese mills no longer view them as a viable alternative.
“Vale is able to blend more Carajas fines in their Brazilian Blend fines mixture to offset this issue but other miners do not have such solutions if their products are dependent on dry processing after the imposed restrictions,” an international trader said. “Although higher silica levels were tolerated previously, higher coking prices in China have meant that end-users will demand increased discounts for high silica products,” the source added.
For BRBF, specifications remain largely consistent, although demand was not as strong as earlier in the year due to the improved availability of low alumina products, another trader said.
For many Chinese mills keen to capitalize on steel margins that are at their highest in 2019, wider discounts for products with less stable specifications or higher contaminant levels may not be enough to tempt them to alter their sinter feed blending, as they are focused on maximizing production before winter pollution controls are imposed.
The unmatched liquidity of PBF gives Chinese mills the confidence they need to maximize production rates.