The epicentre of the global steel industry, China’s crude steel production in 2018 reached 928.3 MnT, up by 6.6% compared to 2017. Despite rampant clampdowns imposed on polluting IF facilities across the People’s Republic and stringent capacity curtailments, crude steel production, as forecast by experts and market watchers, has reached a plateau and is likely to remain consolidated for the next 5-7 years.
Global iron ore supply disruptions
Iron ore demand, therefore, is on the uptick. Environmental regulations demanded a marked preference for low-alumina high-grade ore, mostly supplied by Brazilian miners. Chinese mills switched to higher-quality steelmaking ingredients as part of a drive to maximize output amid high prices and to curb emissions. However, supply has been considerably disrupted following the dam rupture at Brazilian mining behemoth Vale following which it reduced its estimate on iron ore sales volume for 2019 by 75 MnT vis-à-vis the last estimated forecast.
Similarly, other mining majors such as BHP Billiton and Rio Tinto have announced that production would shrink, due to weather disruptions as the cyclone hit the Pilbara region resulting in suspension of Port Headland, Dampier and Cape Lambert.
According to data compiled by SteelMint, Australian iron ore exports dropped by 12% in Q1 of FY19 to 187.91 MnT vis-à-vis 212.46 MnT in Q4 of FY18. Exports to China (155.24 MnT), which alone accounts for close to 83% of Australian exports, plummeted by 9% compared to Q4 of FY18.
Increasing demand for low-grade iron ore fines
In these unavoidable circumstances of global shortage amid clogged supply networks, low-grade iron ore fines that had fallen out of favour with many Chinese steelmakers is again in demand as mills keep buying the cheaper product. Chinese mills are facing declining profit margins. Therefore, Chinese mills seeking to make out profits are buying low-grade fines as premiums for the high-grade varieties remain high. Global supply concerns are compounded following reports that China’s Hebei province will close 40 mines (other than coal) and 51 iron ore tailings dams. Expectedly, spot iron ore prices in China are on the upswing as a result of global supply concerns.
As a result, discount on low-grade iron ore fines has plummeted to 13% from 16% a month ago. Data maintained by SteelMint research show that this discount has dropped sharply from as high as 42% in Oct-Nov’18 to 33% in Feb’19, 16% in Mar’19 and 13% in Apr’19. Expectedly, narrowing discounts on low-grade fines, coupled with the fact that Indian exporters have the added advantage of no export duty on low-grade fines, are great inducements to exporters targeting the Chinese market.
Indian exporters turn active
Although Indian iron ore exports dropped sharply by 57% to 6.81 MnT in FY19 compared to FY18 and exports to China declined by 57% to touch 5.21 MnT in FY19 compared to 12.01 MnT in FY18, exports spiked in Mar’19 to reach 1.19 MnT from 0.33 MnT in Feb’19 due to increasing demand for low-grade iron ore fines from Chinese steelmakers in the wake of falling steel margins in China.
Naturally, therefore, Indian exporters are shifting gears and getting more active. According to SteelMint research, 596,000 MT of iron ore are lined up for exports in Indian ports in April, of which 387,000 MT are from the eastern ports of the country. Export data maintained by SteelMint show that iron ore exports are again touching the 1.2 MnT mark last witnessed in Apr’18. Exports had shrunk significantly in July-Aug-Sept-Oct’18 before moving up to the 0.8 MnT mark in Nov-Dec’19 and then sliding to 0.33 MnT in Feb’19 before gaining momentum in Mar’19. Given that total Indian iron ore imports to China alone contributed almost 77% of Indian ore exports in FY19, Indian exporters are trying to seize the opportunity.
Essel Mining, a major iron ore miner in Odisha, shared that Odisha-based miners and traders have turned active for low-grade iron ore exports. They have recently booked a vessel of 50,000 MT iron ore fines to China at USD 50/MT FoB India for May shipment and are also looking actively for June shipments. Other prominent exporters from Odisha include Rungta Mines, India’s largest exporter of iron ore in FY19, Bagadiya Brothers, SM Niryat, Fomento Resources and Kashvi Power.
Significantly, compared to Australian fines with Fe content of 62%, the price of which is currently hovering above USD 90/MT CNF China after recovering from the below USD 70/MT CNF China in Dec’18, the price of Indian iron ore fines with a characteristic Fe content of 58% has shot up surprisingly in 2019 inching up close to USD 60/MT CNF China after crashing to USD 40/MT CNF China in Jan’19. This shows how global supply constraints are supporting the price uptick and the preference for low-grade fines among Chinese manufacturers is hard to miss.
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