China pursuing higher grade ore
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Thomson Reuters senior analyst Vishal Thiruvedula investigates the changing iron ore appetites at Chinese mills.
As China continues to focus on eliminating low-grade steel production and reducing total steel production capacity this year in an effort to combat pollution, the need for higher-grade iron ore is becoming ever more critical. All else being equal, the higher the grade of ore, the less the pollution generated to produce steel. Indeed, the premium paid for iron ore with a grade of 65% against iron ore with a grade of 62% currently stands at roughly $14 as of Jun-2017, 4.6 times higher than $3 a year ago.
Rising Chinese imports from Brazil and Australia confirms steelmakers’ increased usage of higher quality Iron Ore
Using the Thomson Reuters Global Iron Ore Trade Flows model, we estimate that Chinese imports for H1-2017 from Australia and Brazil are over 430 Million Tonnes, an increase of 4.5% Y-O-Y.
The two major exporters, Australia and Brazil, now constitute more than 87% of total imports to China in H1-2017, as compared to 86% in 2016 and 85% in 2015. The Australian share of exports to China has remained relatively stable at 66.5% in H1-2017, as compared to 66.5% in H1-2016. Brazil, where Vale is the major producer, contributed 20.1% of the total imports to China in H1-2017, as compared to 19.4% in H1-2017.
The relatively stronger Y-O-Y increase in Brazil’s exports to China as compared to the rest of the world is attributed to rising demand for higher grade ore. High grade ore helps steelmakers reduce the pollution they generate per unit of output, making it easier to comply with the government’s efforts to reduce smog. Also, using higher grade ore in the furnace for steel making reduces the amount of coking coal needed.
Chinese steel production and rebar price rally:
Steel production in China increased by 4.1% for Jan-May 2017 Y-O-Y reported by the World Steel Association and the overall capacity utilisation globally has been trending higher as well compared to the previous year. The increase in steel output in China is reflected in the rally in rebar prices which increased by over 65% as of Jun-17 compared to the same period last year.
Iron Ore exports to remain elevated
With steel output trending higher and coking coal prices remaining elevated, steelmakers in China, the second largest importer of Australian coal after Japan, are expected to rely heavily on iron ore imports for high grade ore to maximize the steel output. In the second quarter of this year, China imported 3% more iron ore than in the same period last year.
Vishal Thiruvedula – Senior analyst, supply chain & commodities research
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