Iron ore prices (62 per cent, CFR) ranged between $63/dmt and $77/dmt over the second half of the calendar year, averaging $69/dmt (+1 per cent YoY). Demand for high and medium grade mainstream iron ore remained firm in the context of the attractive steel margins created jointly by steel Supply Side Reform, healthy end–use demand and periodic production curbs aimed at air quality improvement. Seaborne lump premia trended steadily upwards in the first half of calendar 2018, before settling above $0.30/dmtu for most of the second half.
Global contestable iron ore demand is estimated to have increased 2 per cent YoY (+34 Mt) in calendar year 2018, to 1,589 Mt (62 per cent Fe equivalent, dry basis) –easily the highest level on record. Chinese imports of iron ore declined to 1,065 Mt in calendar 2018, –0.9 per cent lower YoY. However, after accounting for inventory changes at Chinese ports, the implied consumption of imported iron ore edged up by 2 per cent YoY. Asian developing countries also posted a solid year for pig iron production and iron ore imports, notably India and Vietnam.
In aggregate, the seaborne majors delivered an additional +50 Mt (dry) to the seaborne market in the calendar year, up 5.7 per cent YoY. Logistical disruptions and other unplanned outages were a key factor constraining industry–wide performance. These constraints were most pronounced in the seasonally weak March quarter and the seasonally strong December quarter. Furthermore, reductions by swing suppliers such as India, juniors in traditional basins and the temporary closure of Minas Rio combined to displace –48 Mt of supply over the year.
Price sensitive seaborne supply fell away despite attractive benchmark prices as lower grade, higher impurity ores continued to attract steep discounts. Chinese domestic iron ore concentrate production tallied 196 Mtpa in December 2018, +2.6 per cent higher YoY. The small gain partly reflects base effects related to the asymmetric application of winter restrictions YoY, as well as a mild response to favourable market conditions from some non–captive operations. Going forward, we expect that, in addition to structural market based drivers, safety and environmental inspections are likely to have a material influence on the average level and seasonal volatility of Chinese domestic iron ore production.
Our blast furnace customers in China are currently experiencing reduced margins to those they enjoyed in 2017 and for much of 2018. This has encouraged an increase in commercial blending arbitrage, and a reduction in the very high level of lower grade port inventories that had built when margins were exceeding US$100/t. Logically, this has led to a reduction in both the 65 per cent minus 62 per cent, and the 62 per cent minus 58 per cent spreads. Discounts for products with specifications lower than the 58 per cent index have also narrowed, by a handful of percentage points.
Prior to the tragedy in Brazil, we felt that it would not be a surprise to see lower average benchmark prices in the 2019 calendar year versus 2018. That view was built on two pillars: a moderation in steel demand and a lower rate of disruption in seaborne supply. Seaborne supply conditions are now highly uncertain, both in aggregate and in terms of quality profile.
In the medium to long-term, the on–going Supply Side Reform, the expected migration of steel capacity to the coastal regions and more stringent environmental policies are all expected to underpin the demand for high quality seaborne iron ore fines and direct charge materials such as lump. The South Flank project, which was approved in June 2018, will raise the quality of our overall portfolio, in addition to increasing the share of lump product in our total output.
We remain of the opinion that around two–thirds of the movement in product quality differentials since the introduction of Supply Side Reform will be durable. The recent narrowing of differentials is an anticipated development on the path to this gravity point.
We continue to contend that the long run price will likely be set by a higher–cost, lower value–in–use asset in either Australia or Brazil.
source: BHP |
