Iron ore price spike widens concentrate discounts

The average bid, offer and deal levels for iron ore concentrate maintained their premiums to the 65pc index through April, falling from an average premium of around $4.50/dry metric tonne (dmt) in January to below $1.25/dmt in April, Argus market data show. Only a few concentrate offers were flat to the index in May as trade slowed, while 62pc fines prices rose above the $100/dmt cfr Qingdao level.

Concentrate traded at an average discount of above $4/dmt in June and at a discount of $5/dmt in July to date to the 65pc index, Argus data show.

"The discount is deeper, but it does not mean the outright price is lower. Actually with the index surging substantially, the outright price is increasing very fast, despite the deeper discount," a Shandong-based steel mill official said.

The Argus ICX 62pc index has risen by 67pc to $120.55/dmt cfr Qingdao this year, but mills' narrow profit margins have limited gains for higher-grade ores to 50pc for the 65pc index, 47pc for lump and 16-18pc for Indian pellet into China.

The ceiling on pellet price gains and competition from lower-priced domestic concentrate supply have limited price rises for concentrate imports.

"I don't think there will be much improvement in imported concentrate demand soon," with domestic concentrate prices 70-140 yuan/wmt ($10-20/wmt) lower than imported concentrates, a Hebei-based steel mill official said. "Mills are happy to use low-alumina domestic concentrate for pelletising."

Iron ore price increases this year have made more domestic iron ore mines economical but the increase in supply has been modest, with regulations restricting large-scale expansion of iron ore mining.

Tangshan's restriction since 1 July has also dampened demand for imported concentrate as the stricter July restriction has reduced demand for iron ore. Mills will also be fully supplied with domestic concentrate, so there is not much room for more expensive imported concentrate. Imported concentrate in Tangshan is selling especially slow, market participants said.

Signs of demand

There have been signs of liquidity slightly rising at the port in recent days when the price of domestic concentrate increased too fast.

Ten August cargoes of Karara concentrate were sold through a tender early last week at a $5.50/dmt discount to August 65pc index, market participants said. A July tender last month for Karara concentrate also closed at $5.50/dmt below index, market participants said.

The August-delivery cargo of Minas Rio, the 67-68 Fe concentrate produced by Anglo Americans in Brazil, was offered at August P65 index minus $5/dmt last week. And there are traders who think the tradable price may be around the minus $6-7/dmt level.

A July-delivery Karara concentrate was offered at July P65 index minus $5/dmt and Citic concentrate offered at July P65 index minus $6.50/dmt.

The discount for imported concentrate started around early April this year when a cargo of May-delivery Ukraine concentrate was done at minus $1/dmt on 5 April. And the discount deepened when the index rose substantially in May and June. A July-delivery Ukraine concentrate was done at minus $5/dmt in mid-June.

Ukraine concentrate has been traded at the same or narrow price differential with PB fines since early July, despite the former having 64-65pc Fe content while the latter has around only 61.5pc Fe. Ukraine concentrate was done at Yn905/wmt at Caofeidian port, exactly the same price for PB fines at the same port on 5 July. It was done at Yn915/wmt at Shandong on 12 July, slightly higher than PB fines at Yn895/wmt at Shandong on the same day. It was done at Yn910/wmt at Lianyungang on 17 July, only Yn20/wmt lower than PB fines at the same port

An east China steel mill has sold a cargo of 66.49pc Brazilian concentrate at Yn895/wmt at Lianyungang port on 15 July. Iran pelletising concentrate sold at Yn910/wmt at Lanqiao port of Shandong on the same day, with the PB fines price at the Yn890-900/wmt level.

The future of the pelletising industry

Minas Rio concentrate is now mainly sold to China through long-term contracts, and the project has such contracts with five to six mills in total in China. Apart from this, not many cargoes are sold in the seaborne market — maybe just one cargo every two months, market participants said.

The discount for long-term contracts for Minas Rio concentrate in July is minus $7-8/dmt, while the discount for long-term contracts for Citic concentrate in July is minus $6.50-7/dmt, market participants said.

Minas Rio uses the rotary kiln electric furnace (RKEF) process or travelling grates rather than shaft furnaces for pelletising so that its concentrate can be sold to large or medium-sized steel mills, as the RKEF process and travelling grates are more popular with such mills and also more environmentally friendly.

Shaft furnaces, which creates more pollution, are used mostly in small steel mills for cheaper and quicker pelletising. But with environmental measures becoming stricter the RKEF process and travelling grates may be the future of the pelletising industry, as shaft furnaces face being phased out.