Iron ore’s been becalmed, but beneath the surface the global market is in a state of tremendous flux. While benchmark spot prices are poised to cap six months of trading in the $60s this week – a remarkable departure for a commodity once known for its extreme volatility – that steadiness masks an increasingly segmented industry as purity and form matter more than ever. Here’s a look at some of the main trends of 2018.
Steady as it goes: Since dropping into a bear market in mid-March, benchmark spot ore with 62% iron content has more or less flat-lined, holding in the $60s a metric tonne, according to Mysteel.com.
That contrasts with the sharp swings typical of recent years – in 2017, prices covered a range of more than $40 – and comes amid a robust performance in the global steel industry, especially in China, and increases in iron ore supplies from top miners including Brazil’s Vale SA.
Calum Austin, associate director of commodity derivatives at Singapore Exchange, says that $70 has become a “resistance level, which we’ll have to close above with conviction to confirm whether recent price action is now trending higher or merely touching the upper band.”
Sanford C Bernstein is among the bulls, forecasting that prices – which were last at $67.95 a tonne – are now expected to “recover meaningfully.”
Winning grades: While benchmark prices have been steady for a half-year, the spreads between grades have gapped out, with high-quality, 65% ore topping $96 a tonne this week. The driver is China’s unprecedented clampdown on pollution, with curbs on mills spurring demand for the most efficient and cleanest inputs. Closures of steel capacity this winter are likely to be stronger than last year, Australia & New Zealand Banking Group said in a note.
“We think the differentials will be maintained because of the drive for quality and productivity,” Julian Kettle, vice chairman of metals and mining at Wood Mackenzie, said in an interview in Singapore. His long-term forecast has premiums for high-grade ore at 20%, and discounts for low-grade material at 15%. Peter Poppinga, Vale’s head of ferrous metals, said in July he sees the healthy premium paid for better quality ore as sustainable.
The lump bump: The ramifications of China’s concerted chase for blue skies extend beyond the purity of content, with the clean-up driving a preference for raw material that comes in the form of lump or pellet. The reason is that, in contrast to iron ore fines – which are like sand – steelmakers can feed them straight into blast furnaces. That cuts out the polluting, intermediary process of sintering. There’s lots of “new investor interest in lump and pellet markets now,” Macquarie Wealth Management said in a recent note. “Being naturally agglomerated, lump is a preferred feedstock for steel production.” Macquarie noted that the premiums paid for lump and pellets are testing record highs.
Miner matters: China’s big clean-up is bad news for many of its own iron ore miners, with mainland producers facing tighter restrictions, more rigorous inspections and higher expenditure. A WoodMac study found that in Hebei, China’s largest producing region, the crackdown would raise local costs more than a third. “We cannot see any reason for domestic production to increase,” it said.
The corollary is that the drive will benefit overseas suppliers, especially Vale, Rio Tinto Group, BHP Billiton, and Fortescue Metals Group Ltd Vale’s bringing on high-grade output from its vast S11D project, and Citigroup Inc projects that company-wide shipments will soon top 100mn tons a quarter. Fortescue has said it’s raising the average iron content of its supply.
Scrap warning: While the shakeup of China’s mining industry will aid overseas producers by buttressing import demand, suppliers from Australia and Brazil are still facing a separate, long-run challenge from the increased use of steel scrap by mills.
After years of steady growth, the mainland’s iron ore imports stand at 710mn tonnes so far in 2018, little-changed from 2017’s pace.
China’s “steel production is performing better than iron ore imports but much of the growth has centred on electric-arc furnace producers that consume scrap,” Barclays Plc said in a report this week.
By 2020, the nation’s EAF mills may double their share of total steel production to 20%, according to a projection from Mitsubishi UFJ Morgan Stanley Securities Co.