why the quality spread on iron ore products is widening

trade review: soaring iron ore prices set to face hurdles in q1 | s&p global platts

trade review: soaring iron ore prices set to face hurdles in q1 | s&p global platts

This report is part of the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in metallurgical coal, iron ore, scrap and alumina. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Seaborne iron ore prices defied the usual late year seasonal slowdown to hit multi-year highs in the final quarter of 2020, with demand fueled by strong steel margins and high output -- but margin pressures and the seasonal Lunar New Year holiday slowdown are likely to take the heat out of the rally in the first quarter of 2021.

The S&P Global Platts 62% Fe Iron Ore fines index, or IODEX, surged to a nine-year high at $177.15/dry mt CFR China Dec. 21, after starting the quarter at $123.15/mt, due to a combination of speculative buying and restocking ahead of winter and Lunar New Year.

Chinese steel margins, particularly for domestic rebar, have since come under pressure in early January, which could spur some pushback on rising iron ore prices. China's ban on Australian coking coal imports has increased both CFR and domestic prices, eroding steel margins in the process, although flat steel margins have been more robust due to the recovery in manufacturing.

Iron ore prices in Q1 will likely find support in lower supply from Australia and Brazil due to wet weather curtailing exports. The Platts Iron Ore & Steel Outlook survey for the quarter found that 62% of respondents expected the IODEX to sit just above $120/mt CFR -- a big price correction from current levels, and likely to prove a conservative view.

Spreads between the mainstream MNP fines -- Mining Area C, Newman and Pilbara Blend -- gradually narrowed over Q4 and formed the bulk of sinter feed for Chinese mills. To a certain extent, these iron ore products are interchangeable.

High domestic coke prices meant end-users were reluctant to make significant changes to their blast furnace operations that would result in higher coking costs. This resulted in mills preferring a more streamlined sinter feed blend, a situation likely to continue in Q1 if China's domestic coke prices strengthen further.

Spot premiums for Pilbara Blend fines or PBF surged to a quarterly high of more than $5/dmt over the loading month in October, dampening speculative interest as seaborne prices became higher than those at port.

The trend of procuring cargoes from ports led to an increasing lack of liquidity for seaborne cargoes. Selling pressure emerged as premiums for January loading PBF fell to less than $3/dmt, with sellers looking to avoid landing cargoes.

Despite strong appetite for port stocks, material held at Chinese ports ended 2020 at almost the same level as it started the year -- at 124.5 million mt Dec. 27, compared with 124.6 million mt on Jan. 5, CEIC data showed.

Brazilian Blend fines, or BRBF, were sold at more than $6/dmt over low alumina indices on a month-plus-one basis. Market sources pointed to BRBF's low alumina and typical 63% Fe grade as ideal for improving production efficiency.

Given high coking costs, iron ore fines with high silica levels continued to be discounted. With premiums for mainstream medium grade fines weakening on the back of overall iron ore price strength, sellers were under pressure to widen their discounts for cargoes due to thinning liquidity.

High iron ore prices initially led to monthly term contract discounts for FMG's low grade Super Special fines and Fortescue Blend fines narrowing from 6% to 4% and 3% to 2% respectively in November from October, as weaker steel prices led to end-users cutting costs.

However, a resurgence in steel margins led to a shift away from lower grade fines, with discounts for SSF and FBF widening in December to 7% and 4% respectively, despite surging iron ore prices. Discounts for Indian fines also widened as buyers turned back to mainstream sinter fines.

Lump premiums saw a steady recovery in Q4 on the back of increasingly expensive pellets and the broader preference for higher grade raw materials. For much of Q4, seaborne lump premiums were subdued given minimal lump premiums in the portside market. The push for production efficiency also helped kick-start the greater utilization of lump.

Seaborne pellet prices and premiums rebounded in Q4 from a slump in Q3, with the 65% pellet premium hitting a year-to-date high of $44.10/dmt in December and the 64% pellet index an all-time high of $200/dmt CFR China in the month.

The restoration of blast furnace utilization rates in Europe, North Asia and North America took pellet supply away from China, reversing the trend seen earlier in 2020 when all the unwanted pellet supply was diverted to China. There was subsequently little high grade pellet availability, and China premiums bounced back strongly.

New production capacity in Southeast Asia, along with end-users restarting operations, was also seen as a demand driver. Market sources expect stronger demand for Indian pellets in Q1 as a replacement for European high-grade pellets, given the lack of spot availability.

One of the more unusual trends seen in Q4 was the spread that emerged between hematite and magnetite sintering concentrate. Magnetite concentrate is mainly used for pelletizing purposes, but the lack of Chinese end-users with pelletizing facilities meant it was used for sintering instead. This resulted in discounts, as magnetite quality is not as good as hematite for sintering.

The impact of high coking costs and discounted valuations for high silica material were evident in the concentrates market, where low contaminant variants from Chile and Peru received high premiums despite their magnetite qualities.

China's domestic 66% grade concentrate prices rose by 17% from the previous quarter in Q4, with demand supported by firm steel prices, before starting to weaken in winter due to environmental concerns and operational restrictions.

trade review: china's policies cast shadow over price strength of iron ore | s&p global platts

trade review: china's policies cast shadow over price strength of iron ore | s&p global platts

Singapore This report is part of the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in steel, iron ore, metallurgical coal, scrap and alumina. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Strong iron ore prices have been touted as a key indicator of an emerging post-pandemic commodity super-cycle since reaching a nine-year high of $178.45/dmt March 4, but volatility since then provides a sneak peek into how China's emissions curbs could tilt iron ore prices off-course in the months to come.

Stepped-up production curbs in the steelmaking hub of Tangshan to improve air quality and in response to a central government target of reducing crude steel output in 2021 have divided the market outlook on price direction, as crimping steel output can potentially result in opposing outcomes.

On one hand, steel production curbs could suppress iron ore demand, causing prices to fall. Proponents of this view note the Platts Iron Ore Index or IODEX recorded its largest single-day loss on record March 9, plunging $10.55/dmt on the day, after Tangshan mills were ordered to lower production to meet level 1 red alert response procedures due to heavy pollution. The last time the level 1 red alert response was activated was in 2017.

Historically, the latter scenario has prevailed most often in China, largely due to the loose implementation and localized nature of steel production curbs. Some mills simply did not adhere to the cuts. During a spot check in March, four Tangshan mills were found operating at higher rates than allowed and falsifying records. However this time, the production curbs were subsequently made more stringent.

Again market opinion was divided: Some market sources attributed the surge to speculators having short-sold physical cargoes earlier in the month as Tangshan intensified production curbs, while limited spot supply subsequently forced these speculators to pay unprecedented premiums to secure cargoes.

Rising coke prices drove the initial divergence; as the price of coke, which can remove impurities in iron ore, reached record highs, blast furnace economics started to favor higher iron content, lower-impurity ores, as their savings on coke more than offset the extra cost of higher-grade ore.

The indexes diverged again in late March, this time due to widening steel margins. As steel demand continued to recover, the curbs in Tangshan tightened supply, lifting steel prices and margins. Mills elsewhere in China reacted to these price signals by switching ore blends to higher grades to maximize output.

This was a double whammy for the 58% Fe index, both reducing demand for lower-grade ore and increasing prices for the 65% Fe index, in turn exerting further downward pressure on the 58% Fe index, as mills weighed the price of high-low grade combinations against the medium grade to optimize cost.

Some contaminants, such as alumina and silica, in iron ore need to be removed using coke during the iron-making process. The higher these contaminant levels are, the more coke is needed. Coke prices in China peaked around Lunar New Year -- as did alumina and silica price adjustments to the IODEX, as steel mills' tolerance of contaminants is inversely proportionate to the cost of coke.

Direct feed premiums typically come under pressure in March as heating season demand in China wanes after winter. However this year the tightened supply of Australian lump, stringent sintering curbs in Tangshan in early March and a strong rebound in demand outside of China lifted direct feed premiums, with the lump premium in particular reaching a record high of 54.25 cents/dmtu on March 23.

China's production curbs and emission cuts favor demand for direct feeds over fines. Higher steel margins bolstered by the production curbs could encourage mills to use more high-grade materials, including direct feeds, in Q2. Direct feeds also produce less emissions, which is a focus of China's current 14th Five-Year Plan.

However price downside is possible as the sinter feed ratio increases after winter, reducing demand for direct feeds. Mills have also started to free up lump supply from their contracted volumes due either to lower requirements or profitability considerations.

The steel production curbs have reduced Tangshan mills' iron ore requirements, prompting the release of excess contract volumes, including lump, into the market. Some mills in northeast and south China have also started to on-sell their contracted lump cargoes and rely more on sintering fines instead. Australian lump supply may also increase in Q2 as cyclone season passes.

why the quality spread on iron ore products is widening

why the quality spread on iron ore products is widening

The mined iron ore is usually sold to steel makers as concentrate, fines, pellets, and lump. Concentrate ore is processed into separate deleterious elements and produces a higher quality product of 63%69% content. Lump iron is between six30 millimeters in size, while anything below six millimeters is considered fines which have iron content ranging from 56%66%. Pellets are produced by agglomeration and thermal treatment, with grades ranging from 67%72% iron. The lump is richer in iron content. Its preferred to fines because fines have to be processed through sintering first, which is a major source of pollution and sulfur dioxide. Lumps can be directly fed into a furnace for steel-making.

Chinese environmental protection and pollution control measures will necessitate the use of higher content. As a result of excess supply, steelmakers are asking for discounts on lower-grade materials and suppliers have no option but to oblige. Thats why the premium spread has widened. Six months ago, the premium spread between lumps and fines with 62% content was $8$10 per ton. Currently, its about $17$18 per ton.

Rio Tinto (RIO), BHP Billiton (BHP), Vale (VALE), wont be impacted much by development. However, players like Cliffs Natural Resources (CLF) and Fortescue metals will be impacted negatively because the bulk of their production is low grade. These companies form 18% of the iShares S&P Global Materials Sector Index Fund (MXI).

The premium or discount for any iron ore product is determined by how easy or difficult, time consuming, expensive, and less or more polluting the product is to final production of steel. The ore goes through concentration, which includes processes to upgrade the iron content by removing impurities. Next, it goes through beneficiation, which makes ore more usable by improving its physical properties. Then, the ore is mixed with coke and heated to form an iron rich clinker called sinter. Coke, ore, and sinter are then put into a blast furnace, together with limestone. A hot air blast is done, which separates the iron in molten form at the bottom of the furnace, which forms pig iron. This iron is processed further by removing carbon and adding steel scrap and other metals according to the nature and purpose for which the final product will be used, which forms steel. It takes about 1.5 tons of iron ore to produce one ton of steel.

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why china needs australian iron ore for years to come

why china needs australian iron ore for years to come

Former Treasurer Wayne Swan and Antipodes Partners portfolio manager Sunny Bangia will be discussing Chinas growth and investing opportunities at the Yahoo Finance Live Summit on 17 June, 10am AEST. Submit your questions here.

Thats whats expected to happen to Australias economy when China stops or reduces its imports of Australias iron ore, according to Chen Hong, the director of the Australian Studies Centre at East China Normal University.

Despite the frosty relationship between China and Australia that has led to trade restrictions imposed on several key Australian exports like lobster, beef and wheat, iron ore has remained relatively untouched.

Chinas still buying huge amounts of Australian iron ore, and in the first five months of the year snapped up 444.9 million tonnes. Over 2020, China bought 81 per cent of all the iron ore Australia shipped overseas.

Iron ore prices have set and reset record-high prices in recent weeks, reaching a peak of US$229.50 a tonne, prompting frustration from Chinese authorities who said it would severely punish excessive speculation, price gouging and other violations.

By volume per month, however, China has been importing less iron ore as of late: May saw 89.8 million tonnes, down from $98.6 million purchased in April and $102.1 million in March. Total imports from Australia to China in May came to US$13.6 billion.

China is also ramping up its recycling of scrap steel. Slightly more than a fifth (22 per cent) of its crude steel being produced in China is based on recycled scrap steel but Chinas five-year Made in China 2025 plan will see this increased to 30 per cent by 2025.

Furthermore, China has been looking to source the commodity from Brazil or Africa, though experts have said alternative markets cant compare to the quality and volume that Australia can currently supply.

Western Australia would be especially hard hit by losing hundreds of thousands of jobs related to the mining industry. Australia would lose its international trade surplus and experience a drop in living standards.

Its very hard for China to switch away from Australian iron ore without damaging its own economy as there is simply not enough supply globally, he told Yahoo Finance. After all, Australia produces more than 50 per cent of global iron ore exports.

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why was iron so important during the industrial revolution?

why was iron so important during the industrial revolution?

Iron allowed for economic expansion during the Industrial Revolution by serving as a key manufacturing material, and through its value in shaping and constructing various types of infrastructure, namely bridges. The Industrial Revolution saw substantial economic growth in many sectors of the economy, primarily in transportation, mining and construction. Exponential economic growth required fuel in the form of raw materials, which primarily came in the form of iron and later steel.

Iron allowed for economic expansion during the Industrial Revolution by serving as a key manufacturing material, and through its value in shaping and constructing various types of infrastructure, namely bridges. The Industrial Revolution saw substantial economic growth in many sectors of the economy, primarily in transportation, mining and construction. Exponential economic growth required fuel in the form of raw materials, which primarily came in the form of iron and later steel.

Although sturdy and solid, iron in the 1700s saw limited use. Iron processing facilities were small and only handled small quantities of iron at a time, making iron production limited in output and expensive. Prior to the Industrial Revolution, the process of iron production involved combining and melting iron with other sources of fuel, primarily charcoal. However, the increased economic activity demanded a greater consumption of resources. As a result, the number of trees available for charcoal production dwindled, leading to experimentation with other heating sources. Eventually, the synthetic material of coke proved a good replacement for charcoal. Coke and iron, when combined, produced smelted iron. Its low melting point and durability gave smelted iron a leading role in engineering, where it helped build infrastructure such as buildings and their components, steam engines and residential items including furnaces.

Although sturdy and solid, iron in the 1700s saw limited use. Iron processing facilities were small and only handled small quantities of iron at a time, making iron production limited in output and expensive. Prior to the Industrial Revolution, the process of iron production involved combining and melting iron with other sources of fuel, primarily charcoal. However, the increased economic activity demanded a greater consumption of resources. As a result, the number of trees available for charcoal production dwindled, leading to experimentation with other heating sources. Eventually, the synthetic material of coke proved a good replacement for charcoal. Coke and iron, when combined, produced smelted iron. Its low melting point and durability gave smelted iron a leading role in engineering, where it helped build infrastructure such as buildings and their components, steam engines and residential items including furnaces.

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