Trade Review: Asian iron ore prices at crossroads of China's post-pandemic recovery in Q3

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 scrap. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Asian iron ore prices landed at a crossroads following one of their worst second-quarter performances ever, yet the expectations of more stimulus measures in China and the reality of steel output cuts paint the third-quarter outlook hazy.

The 62% Fe iron ore index, or IODEX, dipped 24.87% in Q2 to 120.1/dmt CFR China June 30 as China's pandemic curbs, followed by floods in South China and high temperature in North and East China, continued to suppress steel demand.

Some Chinese steel mills, especially the private ones, have started to voluntarily cut steel output as weak steel demand dragged their margins into negative territory.

The price spreads between the different grades of fines narrowed as a result, with Chinese steel mills prioritizing cost savings over productivity. Tolerance towards impurities also increased, pushing down the per 1% differentials for silica, alumina and phosphorus.

Rising preference for fixed price trades

The top three miners shipped out more volumes in Q2 than in Q1, with Vale leading the way, followed by BHP and Rio Tinto, according to Platts cFlow ship and commodity tracking software from S&P Global Commodity Insights.

Despite significant improvement in shipment volume, sale of Vale's spot mainstream cargoes -- Carajas Fines, or IOCJ, and Brazilian Blend Fines, or BRBF -- were lower. Production constraints in the Northern System persisted in Q2, limiting IOCJ supply. BRBF, being a blended product of IOCJ with lower-grade higher-silica fines, also saw reduced spot supply. The excess medium-to-high silica fines from the Southeast and Southern Systems were sold on their own, with S&P Global capturing more of such trades in Q2.

With the seaborne #ironore market entering Q3 under pressure from weak #steel margins and output cuts, where do you see prices at the end of the quarter?

(Note: The result of this poll has no bearing on Platts price assessments)

— S&P Global Commodity Insights Metals (@SPGCIMetals) July 7, 2022

BHP sold fewer spot mainstream cargoes in Q2, with the drop in MAC Fines and Yandi Fines partially offset by the rise in Newman High Grade Fines and Newman Blend Lump, Platts cFlow data showed. More lower quality spot Jinbao Fines cargoes were sold.

Market sources said that the rise in Jinbao Fines supply was associated with the ramp up of the South Flank mine, as the top layer of a new mine usually produces lower-grade materials.

Compared to Q1, Rio Tinto sold more spot mainstream cargoes of Pilbara Blend Fines, or PBF, as well as non-mainstream cargoes such as SP10 Lump Unscreened, SP10 Fines and RTX Lump, according to spot trades tracked by S&P Global.

Rio Tinto reported the delivery of the first ore from the Gudai-Darri mine on June 14. The ramp up of Gudai-Darri and the commissioning of the Robe Valley wet plant would underpin rising supply from Rio Tinto in the second half of 2022.

An inclination to trade on a fixed-price basis was apparent in Q2 when prices came under pressure, as buyers might be betting on a near-term rebound and some sellers might want to avoid giving a discount on their products.

Compared to Q1, BHP and Vale sold higher portions of their spot cargoes on a fixed-price basis in Q2. Year-to-date, Rio Tinto sold a high percentage of their spot PBF on a fixed-price basis, except in May, when the premiums for PBF turned positive from deep discounts in March and April, according to spot trades tracked by S&P Global.

Direct feed premiums under pressure

Direct feed premiums failed to sustain at higher levels despite limited supply, as demand struggled to stay strong in Q2.

Seaborne lump premiums started the quarter at 31.25 cents/dmtu on April 1 and peaked on May 24 at 37 cents/dmtu on the back of tight supply and easing coke prices. However, lump uptake slowed down subsequently with ailing mill margins and wet weather in China. Seaborne lump premiums ended the quarter at 10 cents/dmtu on June 30, down 68%.

The 65% Fe Blast Furnace Pellet Premium weakened throughout the quarter from $55/dmt on April 1 to $29.6/dmt on June 30. Price faltered as European demand weakened despite the supply crunch caused by the Russia-Ukraine war. Only two cargoes of 63% Fe 2.1% Alumina Indian pellets were heard China-bound in the quarter.

Similarly, the 63% Fe Blast Furnace Pellet Premium fell for most of the quarter, from $24/dmt on April 1 to $16.7/dmt on June 30. In general, weak steel margins saw Chinese end-users shunning pellets in favor of lump for direct feed raw material, suppressing pellet premiums.

The implementation of 45% export duties on pellets by the Indian government on May 22 did not lift pellet premiums. Sources continued to see extremely weak demand from Chinese end-users, with two cargoes of Indian pellet heard sold to ex-China buyers after the introduction of the export duties, one to the Middle East and the other to Malaysia.

Some sources expect improvement in lump premiums in Q3 after prices bottomed out in Q2, but the demand for imported pellets is likely to remain weak with more cost-effective alternatives.