Trade Review: Signs of better downstream demand key to iron ore price recovery in Q1

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Steelmakers, having experienced at least eight months of weak margins may finally be seeing a light at the end of the tunnel come first-quarter 2023, driven by hopes of a near-term improvement in downstream demand.

Underpinning these expectations are India's removal of export duties for pellet mid-November, China's abandonment of its zero-COVID policy and its expressed aim of reviving the property market.

Platts-assessed 62% Fe iron ore index recovered in the fourth quarter of 2022 by 22.3% to close at $117.35/dmt CFR China Dec. 30, S&P Global Commodity Insights data showed. The index bottomed out at $79.50/dmt CFR China on Oct. 31, 2022; last seen treading above the $100/dmt mark on Sept. 15.

Moving forward, as mills continue to face low steel production margins, the market remains on the lookout for a pick up in downstream steel demand to rouse a greater requirement for iron ore.

Spark in speculative activity hikes up prices

The prevalence of fixed price trades in the seaborne spot market remained in Q4 despite seaborne liquidity winding down amid diminished import margins, with the spread between Platts 62% Fe Iron Ore Index and the corresponding Platts Iron Ore Port Stocks Index for East China at minus $1.53/dmt Dec. 30, having reached plus $4.95/dmt on Sept. 30.

Spot transaction volumes for mainstream fines cargoes by major miners BHP, Rio Tinto, and Vale in Q4 fell 10.7% quarter on quarter, S&P Global data showed, as 68 out of a total 109 of such deals having concluded on a fixed price basis. This puts the ratio between fixed to floating deals at a high 62.4%, only second to Q3 when it hit a year-high 63.9%.

In which 2023 quarter will #ironore prices peak?

— S&P Global Commodity Insights Metals (@SPGCIMetals) January 11, 2023

While bullish traders participated more speculatively in the seaborne market, Chinese end-users maintained a cautious buying stance and procured only to fulfill basic needs.

Cost competitiveness remained key as Chinese steel mills continued to operate despite negative margins, with demand for low- and medium-grade fines, particularly those with deeper discounts, continue to strengthen.

A pick up in demand for low-grade fines was observed towards the end of December as the spread between Platts 62% Fe and 58% Fe iron ore indexes widened to $19.20/dmt, its highest since June 2022, S&P Global data showed.

Despite initially moving further downwards, pressure on Platts differentials eased towards the end of the year, as certain bands of alumina and phosphorus impurity penalties began to rise.

Catch up in spot activity for low-alumina cargoes

At the tail end of Q4, sellers were more willing to launch tenders for low-alumina cargoes to test the market, amid expectations of tighter supply from Vale as Brazil entered a rainy season. The trend might extend to Q1 2023, which is traditionally a lull season for Brazil and Australia, as cyclones approach the latter.

Poor demand for low- to medium-grade fines cargoes with low-alumina content weighed on the Platts low-band alumina differential, which fell to $1.70/dmt on Nov. 4, the lowest since January 2021. The trend only reversed from Dec. 6 as demand picked up on the back of a stronger 2023 ferrous market outlook and reintroduction of higher-alumina content Indian iron ores to the Chinese market.

S&P Global observed 53 Brazilian low- to medium-grade fines products traded on the spot market in Q4, compared with the 56 deals done each in Q3 2022 and Q4 2021. For Australian low-alumina fines, BHP sold 12 Yandi fines spot cargoes in Q4, compared with 18 in Q3 2022 and 19 in Q4 2021, according to trade data observed by S&P Global.

Pressurized mill margins, loose sintering cuts during winter and stagnant iron ore and steel demand from ex-China Asian markets were major reasons behind the pent-up demand for low-alumina ore in Q4.

Liquidity and prices for various Brazilian low-alumina fines on the seaborne market, especially those with discounts to the IODEX, only improved in the last two months of 2022.

Seasonally popular direct feed struggles for demand

In the winter season, demand for direct feed like lumps and pellets tend to see vast annual improvements amid government implemented sintering cuts in China. Sintering restriction policies were more prominent in the winter of 2021, as pressurized mill margins kept steel mills away from high-grade products in 2022.

The number of spot lump cargoes sold by miners BHP and Rio Tinto in the last quarter of 2022 was more than fourfold that of Q4 2021, with 31 sold compared with seven in 2021, in anticipation of heightened seasonal mill demand, S&P Global data showed.

Despite an early spike, weak mill margins combined with accumulated lump supply and resilient coke prices in Q4 put a lid on lump premiums, which closed at 10 cents/dmtu Dec. 30.

A revival in interest for Indian pellet and low-grade fines by the Chinese market was observed following India's removal of its 45% export tax duty.

Even though there was a trading demand boom for pellets in the first two weeks after the removal of the tax, with eight cargoes sold by Indian producers compared with none in Q3, inherent demand from mills remained weak. This pressured the Platts-assessed 65% Fe and 63% Fe pellet premiums to close at a low of $16.65/dmt and $8.60/dmt, respectively; the former reaching its lowest since September 2022.

With the price of lumps and pellets inching closer to each other, market participants expect a short-term pick up in pellet demand amid shifts in procurement preferences as cost-effectiveness of the product returns.

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