BHP sells higher portion on spot than main competitors
Alumina differentials track Brazilian supply closely
Blast furnace direct feeds attractively priced
China's iron ore demand could well defy both seasonal trends and a bleak global demand outlook to remain firmer than usual in the third quarter, but the increasing return of supply means prices are likely to come under more pressure than in Q2. The country's iron ore market was a global rarity in Q2, remaining firm as it emerged early from coronavirus lockdowns.
Seaborne iron ore prices returned to $100/mt CFR China at the end of May and have largely remained there since. Record crude steel production in China in May, the resumption of construction activity, and supply constraints in Brazil combined to keep the S&P Global Platts 62% Fe iron ore benchmark (IODEX) at historically high levels.
Amid unprecedented uncertainty due to the COVID-19 pandemic, weak domestic hot-rolled coil margins and relatively low iron ore port stocks in Q2, Chinese steel mills largely opted for medium and low-grades ores over higher grade material.
SUPPLY RECOVERY
Iron ore prices typically weaken in Q3 as steel production falls when construction activity in China slows during summer - just as Australian and Brazilian iron ore miners export at full tilt between their severe weather seasons.
Vale's seaborne exports from Brazilian ports recovered in Q2, despite issues at its Itabira mining complex, rising 14% from Q1 to 61.94 million mt, S&P Global Platts cFlow data showed.
The temporary closure at Itabira over early June largely impacted iron ore pellets, indicating that initial market concern it could result in a shortage of fines was overstated.
Australian exporters also recovered in the quarter from a cyclone-affected Q1. Supply in Q3, therefore, should be strong. Allied with weakening steel margins in late June, it suggests iron ore prices may come under more pressure in Q3 than they did in Q2.
Analysis of individual producers shows that BHP has sold at least 11% of its iron ore on a spot basis since 2019, compared with 9% for Vale and 5% for Rio Tinto. (Strip and portside contracts are excluded from the estimates and unreported trades by the miners for brands not included in index assessments may not be fully captured.)
In addition, cFlow data shows BHP's shipments rose by 12% on quarter and by 6% on year to 77.89 million mt in Q2, indicating the miner had more available iron ore to sell in the spot market. Vale's strong exports in Q2 were reflected in a noticeable rebound in spot sales. The ratio had earlier been trending lower since the start of the year, in line with declining export volumes, before bottoming out in April.
Vale was also hit by canceled or postponed term contract shipments to customers outside of China, where steel production was reduced due to the pandemic.
ALUMINA DIFFERENTIALS DIP
Alumina differentials declined at the end of Q2 as Brazilian iron ore export volumes
recovered, and are expected to decline further in Q3 unless the coronavirus situation worsens in Brazil and impacts exports.
Lump and pellet prices came under tremendous pressure in Q2, falling to a two-year low as mills sought cheaper inputs to help manage margins.
On a per dmtu basis, lump was only around 2% higher than the IODEX by the end of June.
Price relativity between 64% Fe pellets and the IODEX also neared a historical low.
Demand for lump and pellets at Chinese ports has started to recover as current prices make them more attractive to mills.
However, port stocks for direct feeds are still high due to weaker demand in the EU and other markets, resulting in more material heading to China.
Furthermore, it takes time for mills to alter their blast furnace inputs, so excess supply will not be absorbed quickly.
High coke prices are also deterring mills from using additional lump, as breaking down lump requires more coke.
Mills typically use more direct input material when avoiding sintering for environmental reasons, but this is less of a factor in the summer months.
Although the influx of direct feeds has subsided as demand gradually recovers outside of China, a noticeable rebound in prices is probably still some time away.
PRICE OUTLOOK OVER $90/DMT: SURVEY
The IODEX has shown some recent signs of weakening, dipping below $100/mt on June 29, on the continued recovery of Brazilian shipments, weaker steel margins and rising Chinese port stocks.
Brazilian supply is expected to recover further in Q3, with Vale expecting its exports to China in calendar year 2020 to surpass those in 2019.
Chinese demand is usually quieter in Q3 as hot weather reduces construction activity and some mills typically take this opportunity to carry out scheduled maintenance.
However, the S&P Global Platts Iron Ore and Steel Outlook for Q3 found that only 29% of respondents surveyed expected China's iron ore demand would fall in the quarter, as steel margins were expected to remain supported by infrastructure and construction demand.
More than half or 52% of respondents expected iron ore prices to average $90-$100/mt in Q3, while 20% saw prices above $100/mt.
But a resurgent coronavirus outbreak in Beijing and temporary mine closures in Brazil in June point to a potentially weaker price environment in Q3 - and any number of unforeseen developments in the pandemic could change market dynamics in a heartbeat.
Yiming Zeng
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BENCHMARK: Platts IODEX
The Platts Iron Ore Index, or IODEX, is a benchmark assessment of the spot price of physical iron ore. The assessment is based on a standard specification of iron ore fines with 62% iron, 2.25% alumina, 4% silica and 0.09% phosphorus, among other gangue elements.
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