China's push for clearer skies has left its mark on iron ore markets

China Photos/Getty ImagesMore blue, less grey.
  • Mid and higher iron ore grades rose on Friday, masking a sharp drop in less-efficient lower grades.
  • The price divergence followed a bounce in Chinese steel markets, along with reports that China may extend environmental restrictions across the country.
  • China manufacturing PMI for June will be released by IHS Markit at 11.45am AEST.

China’s push for clearer skies continues to leave its mark on iron ore markets.

Mid and higher grades rose on Friday, masking continued declines in lower grades. As such, the price discount between lower and higher grades has fallen to the lowest level on record.

According to Metal Bulletin, the spot price for benchmark 62% fines rose by 0.9% to $65.02 a tonne, recovering having fallen to a one-month low on Thursday.

Higher grades also rose with the price for 65% fines lifting by 0.7% to $91.70, leaving it at the highest level since early March.

In contrast, the price for 58% fines tumbled 1.4% to $37.00 a tonne, the lowest level since March 26.

As seen in the chart below, the divergence between higher and lower grades pushed the price discount for the latter to the lowest level on record on Friday.

The strength in mid and higher grades coincided with a burst of buying in Chinese rebar futures in Shanghai.

The October 2018 contract finished Friday’s day session at 3,807 yuan, adding to the substantial gains seen overnight on Thursday. It now sits at a one-week high.

Stronger steel prices helped to drag iron ore futures in Dalian higher with the September 2018 contract finishing the session at 474 yuan, up from Thursday’s night session close of 472.5 yuan.

Coking coal and coke futures also climbed, finishing trade at 1,200.50 and 2,117.5 yuan respectively.

However, keeping with the topsy turvy price action seen in recent months, those gains were partially or fully reversed in overnight trade on Friday.

Here’s the final scoreboard.

SHFE Rebar ¥3,794 , 0.29%
DCE Iron Ore ¥468.00 , -0.85%
DCE Coking Coal ¥1,193.50 , 0.34%
DCE Coke ¥2,102.50 , 1.25%

The reversal in futures coincided with news that China could impose “special emissions restrictions” on industrial firms in as many as 80 cities, according to a spokesperson from China’s environment ministry on Friday.

According to Reuters, enterprises in the thermal power, steel, petrochemical, chemical, non-ferrous metals and cement sectors will be forced to comply with as many as 25 new emissions standards by October, with coking coal producers given another year to make the required adjustments.

The push to improve air quality across the country, especially in northern provinces, has contributed to the widening price gap between low and high iron ore grades in recent years.

Higher grades are more efficient, delivering a superior yield for inputs used compared to lower grades.

Improved steel mill profit margins has also added to the widening price discount for lower grades.

Trade in Chinese commodity futures will resume at 11am AEST, 45 minutes before the release of Chinese manufacturing PMI data from IHS Markit for June.

Over the weekend, the Chinese government released its own manufacturing PMI, revealing a slowdown in the nations industrial sector in June.

It came in at 51.5, down from 51.9 in May and below forecasts for a smaller decline to 51.6. A reading above 50 indicates that perceived activity levels improved from a month earlier.

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