Trade Review: Sluggish Asian steel demand to dampen pace of iron ore price recovery in Q4

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

With China's property slump and pandemic resurgence putting a lid on hopes for demand recovery, iron ore prices in Asia will continue to grind lower in the fourth quarter as steel production cuts intensify during the winter season.

China's property sector had a turbulent last quarter, with default of loans from buyers and developers a common occurrence, slowing private residential construction in the country.

The country's stringent pandemic curbs in an effort to stamp out every COVID-19 outbreak only aggravated the pain for the iron ore market, as construction activities took a toll.

The 62% Fe iron ore index, or IODEX, plunged further in Q3 by 25.17% to close at $95.95/dmt CFR China Sept. 30. The index has fallen 24.87% and 64.99% from Q2 and Q1, respectively.

Going ahead, China steel production cuts this winter following environmental curbs will likely keep the iron ore market under sustained pressure.

Weak mill margins shift procurement preferences

With mill margins running in losses for large part of the quarter, demand for low-grade and discounted medium-grade fines saw a sharp boost, as mills prioritized cost-efficiency.

S&P Global Commodity Insights observed BHP selling 32 cargoes of Jimblebar Fines (JMBF) in Q3, compared to 24 and 22 in Q2 and Q1, respectively.

Miners' inclination to sell at a fixed price was apparent when cargoes were offered at discounts amid poor mill demand.

S&P Global data showed that 77.5% of Rio Tinto's flagship Pilbara blend fines (PBF) were sold on a fixed-price basis.

Propped up demand for these medium-grade Australian fines saw the spread between IODEX and MACF and IODEX and JMBF narrowing the most in Q3, at $5.15/dmt and $8.1/dmt, S&P Global data showed.

As weather conditions for iron ore production improved in Brazil, shipment volume of Brazilian cargoes -- usually low in alumina and high in silica -- to China soared.

Vale sold the highest spot volume of Brazilian Blend Fines (BRBF), high-grade Carajas Fines (IOCJ) and non-mainstream high silica Brazilian cargoes in Q3 at around 8.23 million mt, up 42.25% and 118.2% from Q2 and Q1, respectively. CSN similarly sold about 2.5 million mt of IOC6 fines in Q3 alone, as recorded by S&P Global.

Despite the influx of Brazilian cargoes into China during the quarter, deteriorating mill margins supported the demand of such cargoes.

Mills became more receptive towards impurities, causing the differentials for alumina, silica and phosphorous to reach a nine-month low by the end of Q3.

High-grade, lump demand dwindles

Demand for high-grade fines weakened in Q3 as mill procurement was skewed towards more cost-competitive sinter cargoes with focus on keeping production costs low.

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The spread between the 65% Fe and 62% Fe iron ore indexes narrowed to $10.5/dmt on July 26, the most since December 2020. Compared to Q3 2021, the spread was at an all-time high of $35.5/dmt on July 22, 2021.

Seaborne lump premiums started the quarter at 10 cents/dmtu and reached its lowest point of the year on July 22 at 4.8 cents/dmtu on the back of stunted demand, as Chinese end-users consciously kept blast furnace lump ratios low.

Subsequently, lump premiums remained rangebound at around 9 to 10 cents/dmtu, as strong supply and poor direct-feed demand continued to pressurize prices in Q3.

As mills increased their lump usage towards the end of Q3, in anticipation of more widespread sintering cuts and ahead of the winter restocking period, seaborne lump cargoes were snapped up by bullish trading houses taking long positions. This saw lump premiums rebounding to close at 19.75 cents/dmtu on Sept. 30.

Despite strengthening lump premiums, the extent of lump demand recovery remains unclear going into Q4 as margin woes persist, clouding any clear direction of mill lump procurement activity.

Rise in strip tenders from major miners

Improvements in production volume and greater supply stability in Q3 usually lifts strip tender sales from major miners.

Rio Tinto concluded 15 PBF only and co-loaded PBF and Pilbara Blend Lump (PBL) strip tenders in Q3, according to trade data observed by S&P Global. The volume increased significantly from Q2 2022 and Q3 2021 when only 3 and 9 strip tenders were seen.

Weak mill margins and tepid end-user demand in Q3 dragged Chinese steel mills away from high- and medium-grade fines, which commanded a premium. PBF, the most popular medium-grade product to mills, narrowed its premium against IODEX on the spot market in Q3.

Eight PBF strip tenders were concluded at flat over the arrival-month average of IODEX, which was the lowest premium level sold by the miner since 2020. Some dubbed this as the best sales strategy for the miner as during the same period, steel mills preferred to purchase from port market and seaborne PBF was commanding a discount of $1-$2/dmt over IODEX.

Vale also sold 3 IOCJ strip cargoes in August, each strip containing 3 to 4 vessels.

Strip IOCJ tenders tend to indicate improving supply from Brazil in Q3 as rainy season ended.

More IOCJ strip tenders are expected in Q4, which might further pressure the spread between the 65% Fe and 62% Fe indexes, especially if mill margins do not see signs of improvement.