Cheap iron ore is becoming expensive

Sean Gallup/Getty Images
  • Iron ore spot markets closed mixed on Tuesday. Higher grades slumped while lower grades soared.
  • The price discount for 58% fines compared to the benchmark narrowed to the lowest level in two years.
  • One iron ore trader put the price reversal in higher grades down to reduced restocking demand ahead of Lunar New Year celebrations. Chinese steel futures also weakened during the session.

Iron ore spot markets diverged on Tuesday with steep falls in mid and higher grades masking continued gains in cheaper, less efficient ore.

According to Metal Bulletin, the price for benchmark 62% fines slumped 1.5% to $74.78 a tonne, its largest fall in over a month. The benchmark had previously risen to two-month highs on Monday.

Weakness was also evident in higher grades with the price for 65% fines slipping 1.2% to $88.90 a tonne, easing back from multi-month highs struck a day earlier.

In contrast, lower grades continued to surge with 58% fines jumping by 1.5% to $53.38 a tonne, its eighth consecutive gain in a row. Over that period it’s added 11.8%, extending the rally from late November to a mammoth 34.4%.

It now sits at highs not seen since early April 2017, narrowing its price discount to the benchmark to the lowest level in two years.

The weakness in mid and higher grades mirrored weakness in Chinese steel futures traded in Shanghai.

According to the Shanghai Futures Exchange, the May 2019 rebar contract closed Tuesday’s day session at 3,633 yuan, down from 3,689 yuan on Monday evening. Hot-rolled coil futures also slipped, falling from 3,591 yuan to 3,546 yuan during the session.

That weighed on bulk commodity futures in Dalian with the most actively-traded iron ore, coking coal and coke contracts finishing at 526, 1,215.5 and 2,019 yuan respectively, below Monday’s night session close.

Falling steel prices places downward pressure on steel mill margins, reducing the appeal of using higher quality, higher cost, raw materials. Lower margins may also limit the desire to maintain output levels, further curbing demand for the bulks.

One trader put the weakness in iron ore markets down to reduced restocking demand ahead of Chinese New Year celebrations that will get underway from February 4.

“The restocking process at steel mills is nearing completion as most mills have stored enough raw materials for more than 20 days,” a Beijing-based iron ore trader told Reuters.

“Not much demand is expected until workers come back to work after the week-long national holiday.”

Providing little indication as to what direction steel and bulk commodity prices will move on Wednesday, there was little movement in Chinese futures in overnight trade on Tuesday.

SHFE Hot Rolled Coil ¥3,557 , -0.31%
SHFE Rebar ¥3,642 , -0.65%
DCE Iron Ore ¥527.50 , -0.85%
DCE Coking Coal ¥1,209.00 , -0.62%
DCE Coke ¥2,024.50 , -0.59%

Tangshan, China’s top steel-making city, issued a level two smog alert between January 22 to 25 before futures markets opened, restricting industrial output during this period. That didn’t appear to influence the price action seen during the session.

Trade in Chinese commodity futures will resume at midday AEDT.

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