chinese iron ore market developments and the role of higher … · 2012. 2017. share in steelmaking...

Chinese iron ore market developments and the role of higher-grade material

Alona Yunda, Senior Analyst, Fastmarkets MB research

December 2018

Fastmarkets MB research

Chinese iron ore market developments and the role of higher-grade material

Trends seen in the Chinese iron ore buyingactivity over the past years.

Market fundamentals behind the growingpreference for higher-grade iron ore.

Prospects of demand for higher-grade ironore in China in the coming years.

1

2

3

IO imports fell despite higher BF iron output

6%

Drop in imports of iron ore

Rise in crude steel output

3

-1%

Sources: International Steel Statistics Bureau, National Bureau of Statistics, Worldsteel

-10%

-5%

0%

5%

10%

15%

0

20

40

60

80

100

120

Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18

Year

-on-

year

cum

ulat

ive

Milli

on to

nnes

BF iron output, MtIron ore imports, MtChange in BF iron output, % [RHS]Change in iron ore imports, % [RHS]

In January-October 2018:

2%Rise in BF iron output

Prices for 62% and 65% Fe iron ore diverged

4

0

5

10

15

20

25

30

0

20

40

60

80

100

120

140

160

180

$ pe

r ton

ne

$ pe

r ton

ne c

fr Q

ingd

ao

65% over 62% Fe fines premium, $/t [RHS]

65% Fe fines index, $/t

62% Fe fines index, $/t

65% Fe BF pellet index, $/t

Sources: Fastmarkets MB

From early 2016 to late 2018:

+$43

In 66% Fe concentrate premium

In pellet over 62% fines premium

+$18

+$14In 65% over 62% Fe fines premium

Prices for 62% Fe and 65% Fe benchmarks have more often moved in opposite directions in 2017-18 than in 2015-16…

…and pellet prices more often mirrored the trend seen in higher-grade fines

0

1

2

3

4

5

6

7

8

Wee

ks

Weeks per quarter when prices diverged

65% vs 62% Fe fines

Pellet vs 65% Fe fines

Pellet vs 62% Fe fines


* Q4 results include price movements until the week ended Friday December 7

Spot BF pellet premium vs annual benchmark premium to 62% Fe fines

$40-94Range for spot weekly premiums

$58Negotiated annual premium

6

0

10

20

30

40

50

60

70

80

90

100

$ pe

r ton

ne

Negotiated annual benchmark BF pellet premium, $/t

Implied cfr China spot pellet premium (MBIOI-PT minus MBIOI-62), $/t


What has been driving this higher demand and pricing environment?

What has been driving the growing preference for higher-grade iron ore products among Chinese steelmakers?

Elevated cokingcoal prices

Increased marginsat steel mills

Strong demandfor steel

Environmentalrestrictions


Impuritypenalties

Major gangue components (silica, alumina & phosphorus) are present at higher levels in the 62% Fe index than in the 65% Fe iron ore index.

9

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

Silica

Alumina

Phosphorus

Major gangue components

MB65 MB62

-9-8-7-6-5-4-3-2-10

Jan-

15M

ar-1

5M

ay-1

5Ju

l-15

Sep-

15N

ov-1

5Ja

n-16

Mar

-16

May

-16

Jul-1

6Se

p-16

Nov

-16

Jan-

17M

ar-1

7M

ay-1

7Ju

l-17

Sep-

17N

ov-1

7Ja

n-18

Mar

-18

May

-18

Jul-1

8Se

p-18

Nov

-18

Impurity penalties indicators

for US$/% Al MBIOI Al-VIU cfr Qingdao for US$/% Si MBIOI Si-VIU cfr Qingdao


End-userdemand

Chinese demand and supply of steel products has been pulled higher by a revival in residential construction starts.

10

0%

2%

4%

6%

8%

10%

12%

14%

2016 2017 2018e

Year

-on-

year

cha

nge

Apparent steel demand

Finished steel production

Sources: Fastmarkets MB research

China finished steel supply & demand growth

Steelspreads

Elevated margins at steel mills prompted steelmakers to optimize output while using iron ore with less impurities.

11

0

5

10

15

20

25

30

-50

0

50

100

150

200

250

300

350

$ pe

r ton

ne

$ pe

r ton

ne, e

xcl.

VAT

65% Fe premium over 62% Fe fines, $/t [RHS]

HRC-to-hot-metal price spread, $/t

Rebar-to-hot-metal price spread, $/t


Steel prices rose, providing higher margins

Cokingcoal

After a jump in coking coal prices in late 2016, Chinese steelmakers have been looking to curtail the consumption of metcoal by using higher quality iron ore.

12

0

5

10

15

20

25

30

0

50

100

150

200

250

300

350

$ pe

r ton

ne

$ pe

r ton

ne c

fr Ji

ngta

ng


HCC index, $/t

PHCC index $/t


Elevated metcoal prices contributed tohigher demand and prices for 65% IO

Portstocks

The price spreads between different grades of iron ore have also been reflected in the port stock volumes.

13

0

5

10

15

20

25

30

-8

-6

-4

-2

0

2

4

6

8

$ pe

r ton

ne

Milli

on to

nnes

, mon

th o

n m

onth

Change in inventories from Australia, Mt

Change in inventories from Brazil, Mt


Sources: Bloomberg, Fastmarkets MB

End of the month stocks at Chinese ports

Importsstructure

That said, Australia remains the major supplier of iron ore to China, covering about 2/3 of Chinese total imports.

14

69%

21%

10%

China’s IO imports in 8 months of 2018

AustraliaBrazilRoW

Sources: International Steel Statistics Bureau, Steelhome

Pathway to a lithium benchmark

15

Tested Methodology

What's Next?

Margins

Operating margins at steel mills are facing a squeeze. HRC margin down by 75%, rebar margin down by 57% in the course of seven weeks from early October.

16

-100

-50

0

50

100

150

200

250

300

Jan-15 Jan-16 Jan-17 Jan-18

$ pe

r ton

ne

HRC margin, $/t Rebar margin, $/t


Steel mills margins falling in China

“Early November estimates by CISA suggest that blast furnace iron production will fall further and at an accelerating pace. And even sharper cuts to finished steel production in China imply that reasons behind the reduction are more demand- rather than environment-related,” Alistair Ramsay, Research Manager at Fastmarkets.

Demand

Growth in industrial production (IP) has been slowing down and is forecast to be lower next year, affecting the steel sector.

18

0

200

400

600

800

1,000

1,200

Milli

on to

nnes

Apparent steel demand, Mt

Finished steel production, Mt


Finished steel supply & demand forecast

Production

Growth in the Chinese steel production has slowed down this year; and we at Fastmarkets MB research anticipate the output may inch down in 2019.

19

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0

100

200

300

400

500

600

700

800

900

1000

Year

-on-

year

cha

nge

Milli

on to

nnes

Crude steel output, MtChange, % [RHS]

Sources: Fastmarkets MB research, National Bureau of Statistics, Worldsteel

Chinese steel output boom is over

Ferrous scrapfactor

Although Chinese steelmaking remains primarily BF/BOF-route-based, scrap has been gaining its share over the past couple of years.

20

83% 81% 78%*

17% 19% 22%*

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2012 2017

Shar

e in

ste

elm

akin

g fe

ed

Hot metal/pig iron DRI/HBI (less than 1%) Ferrous scrap

*2018 ytd (January-September)


Scrap and iron metallics shares inChinese steelmaking

Hot metal lost its premium over scrap in 2018

21Sources: Fastmarkets MB research

Annual average HM premiums:

-100

-50

0

50

100

150

200

0

50

100

150

200

250

300

350

400

450

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

$ pe

r ton

ne

$ pe

r ton

ne

Hot metal over scrap premium, $/t [RHS]Hot metal proxy, $/tHeavy melt scrap, $/t excl. VAT

Year Premium, $/t

2014 -23

2015 9

2016 55

2017 54

2018 (ytd till December 7)

-26


Prospects of the iron ore market and higher-grade material in particular in the coming years

• The downside risks to iron ore prices are looming with an anticipated slowdown in crude steel output and dampened construction activity over winter months.

• However, local authorities have recently relaxed their attitude toward restrictions, and expectations that steel production cuts over the winter would significantly restrict steel output have become less probable.

• Meanwhile, soaring premium for BF pellets and 65% Fe fines reached a turning point as Chinese buyers developed some resistance to the surging premiums.

• We expect they have peaked and will start to decline from Q4 2018, although will still remain elevated.

• For the Mena region in particular, we see the DR pellet premium remaining strong on both demand- and supply-side factors with regional DRI start-ups and pellet supply shortages only resolving themselves from 2020 onward.

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• Quarterly updated online platform

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• Price forecasts for 28 different iron ore specifications, including 8 propriety iron ore index prices, including our new 65% fines benchmark price out to 2030

• Dedicated MENA cfr calculations for DR pellet including component freight and DR Premium breakdowns out to 2030

• Price, capacity, production, consumption, trade and operating cost data by mine/steel plant specific to DR pellet

• Detailed and accurate existing and planned regional DRI & steel projects –specific DR pellet demand drivers

Fastmarkets MB research steel raw materials analysts

ALONA YUNDASenior analyst, editor of the Steel Raw Materials weekly tracker, which provides market analysis andindependent price forecasting for all major key steel raw materials. Prior to joining the research team, Alonafor four years covered iron metallics and a wide range of semi- and finished steel products on the editorial sideas a reporter in the CIS, Turkey and Mena team and then as an editor in the European steel team atFastmarkets MB. Before that, she worked at Metal Expert for two years, covering Asian steel markets, as wellas providing analysis and forecasting of iron ore prices in China. Alona obtained a master’s degree ineconomics at the National Mining University in Dnepr, Ukraine.

EMAIL: [email protected]

MIRIAM FALKSenior analyst. Has seven years of experience in commodities and previously worked at S&P Global Plattsbefore joining Fastmarkets research team. She first specialised in analysing supply and demand in theEuropean power market, and later moved on to bulk steel raw materials, where she was responsible forthe buildout of an analytical model of steel mill margins. Miriam is a commentator in the media and atindustry events. She began her career as a policy intern at the Swedish Delegation to the OECD where shereported to the Ministry for Foreign Affairs. Miriam also has experience in international developmentpolicy from working at the Global Policy Forum in New York. She completed her Master's degree atUppsala University in Sweden, with a major in political science and a minor in economics. Miriam alsostudied at Science-Po in Paris for a year.EMAIL: [email protected]

Fastmarkets MBpricing teamrecent achievements

62% Fe Low Alumina Index launched on August 27 and trade done on it

Fastmarkets MB 65% Fe Iron Ore Index is heavily used in physical market

SGX launched high-grade iron ore swaps and futures contracts on December 3, using Fastmarkets MB 65% Fe Iron Ore Index

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chinese iron ore market developments and the role of higher … · 2012. 2017. share in steelmaking...

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