A switch is underway across iron ore markets

Matt King/Getty ImagesDavid Warner of Australia switch hits for six.
  • Higher grade iron ore prices continued to unravel on Monday, seeing the premium to benchmark ore narrow to the lowest level in eight months.
  • Higher grade ore is being impacted by falling steel prices, limiting demand from steel mills as profit margins narrow. Speculation over less severe steel production cuts in China in the months is also helping to bolster demand for lower and mid-tier iron ore grades.
  • Chinese steel prices will likely determine whether recent trends will continue in the period ahead.

Higher grade iron ore prices continued to unravel on Monday, seeing the premium for benchmark ore narrow to the lowest level in eight months.

The outlook for steel production and prices largely explains the continued move.

According to Metal Bulletin, the price for benchmark 62% fines jumped 1.1% to $76.11 a tonne, leaving it at a two-week high.

Lower grade ores also rallied with the price for 58% fines lifting 0.8% to $45.61 a tonne, pushing back towards the multi-year high of $46.19 struck in late October.

However, continuing the recent theme, higher grade ores continued to struggle with the price for 65% Brazilian fines tumbling 1.5% to $93 a tonne, the lowest level since August 27.

Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, put the divergence down to a variety of factors impacting demand across the grades.

“Iron ore prices gained on demand hopes as concerns around China’s steel production restrictions during the heating season eased,” he said.

“While the exact restrictions on sintering and steel production are still unclear, there is a perception that cuts will be less severe given that there are still mills operating at high capacity utilisations rates in northern China.”

Dhar added that there is a cyclical shift underway “towards lower grade ores as lower steel prices weigh on steel mill margins.”

As steel prices have weakened in recent weeks, eroding profit margins at steel producers, demand for more efficient, higher cost ore has fallen. At the same time, speculation that steel production curbs in China during winter may not be overly severe has helped to support demand for low and mid-tier grades, seeing the price premium enjoyed by 65% fines over the benchmark slip to just 22.2%, the lowest level in eight months.

Reflecting the theses that drove spot markets during the session, Chinese iron ore futures rose strongly on Monday despite continued weakness in steel futures.

Rebar futures in Shanghai finished at 3,838 yuan, down marginally from 3,852 yuan on Friday evening. Hot-rolled coil futures were nearly unchanged at 3,615 yuan.

In contrast, iron ore futures in Dalian jumped to 527.5 yuan, up from Friday’s night session close of 519 yuan.

Despite enthusiasm towards the outlook for iron ore demand, coking coal and coke contracts softened, finishing at 1,382.5 and 2,363 yuan respectively, down from 1,387 and 2,413 yuan on Friday night.

As seen in the scoreboard below, all five contracts finished flat to lower in overnight trade.

SHFE Hot Rolled Coil ¥3,605 , -0.36%
SHFE Rebar ¥3,841 , -0.29%
DCE Iron Ore ¥525.50 , 0.57%
DCE Coking Coal ¥1,372.50 , -0.83%
DCE Coke ¥2,338.50 , -2.15%

The mixed and modest movements provides few clues as to how physical and spot markets will fare on Tuesday.

Trade in Chinese commodity futures will resume at midday AEDT.

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