China's iron ore portside discount to seaborne prices shrinks in March as import demand dips

The discount of China's iron ore portside prices to seaborne prices has narrowed $5.87/wmt in a month and was likely to continue shrinking in the second half of March amid lower-than-expected seaborne demand, despite high stock levels at major Chinese ports and expectations of a recovery in domestic steel production in the second quarter.

The spread between port and seaborne prices, after normalizing to the same specifications, stood at $3.49/dmt March 16 after narrowing steadily from $9.36/dmt Feb. 14.

The port price of 62% Fe Iron ore was assessed at Yuan 966/wmt FOT East China March 16, equating to $141.96/dmt on an import parity basis, and the seaborne benchmark 62% Fe IODEX assessed at $145.45/dmt CFR China.

In contrast, the portside market had traded at an average premium of $3.29/dmt to the seaborne market on a 62% Fe basis for seven months in 2021, from late April to early November, and hit a record high of $19.69/dmt on May 10.

The slide from premium to discount coincided with portside stocks rising to 160 million mt in the current quarter from below 120 million mt in Q2 2021, based on observations by market sources, and the spread ended 2021 at a discount of $1.51/dmt.

The portside market has now been in discount to the seaborne market for four months, but that spread was likely to narrow in H2 March as seaborne demand, while strong, was proving weaker than market expectations.

"China iron ore port stocks have started to accumulate since Q4 2021 and reached a peak level in mid-February after the Lunar New Year holiday, at above 160 million tons, which has been the highest level since May 2018 and close to the all-time high of around 163 million tons in 2018," a steel mill source based in Beijing said. "The import loss reached the peak at the same time,"

End-users have mostly deferred port market commitments since the Lunar New Year holiday due to sufficient supply of most iron ore brands, and were mostly now buying on a hand-to-mouth basis.

"We'd like to have traders and re-sellers build stocks on the port for us instead of transferring the title to us to save cost and capital usage," the source said.

"The port market and seaborne market represent slightly different fundamentals, as the port market links to prompt demand and seaborne indices are referring to the cargoes arriving a few weeks ahead," a trader in south China said.

"The port market can move much faster than the seaborne side when the demand surges. Due to the small parcel at typically 5,000 mt to 20,000 mt per deal on port side, the deals are concluded quickly, and the prices can be very volatile during the day," the trader said.

"On the other hand, the port buying interest can diminish quickly when market uncertainties grow, flipping the import trading margin into a loss. The flexibility of the port market makes it a good supplement to the seaborne market," the trader added.

Market sources said the origins of the portside iron ore stocks were now different to 2018 even though the total volume was similar, with the percentage of Brazilian brands higher and Australian brands lower in 2022.

"Brazilian iron ore stocks have picked up since Q4 2021," a trader in north China said.

"Most of the cargoes were high in silica and low iron content and not favored by the Chinese steel mills during the heating season from October to March.

"From a productivity perspective, in order to prepare for the possible steel production recovery in Q2, steel mills still need to procure mainstream Australia fines and high-grade ores such as 65% grade fines and lump from the seaborne market."