The Commonwealth Bank explains why prices for lower grade iron ore will remain under pressure

Marty Melville/AFP/Getty Images
  • Iron ore spot markets have fallen heavily across the board in March.
  • The price premium benchmark 62% iron ore fines commands over lower-grade 58% fines is well above the levels of a few years ago.
  • Commonwealth Bank thinks lower grades could fall back towards record lows seen in late 2015.

Iron ore spot markets fell heavily across the board in March.

According to Metal Bulletin, the benchmark price for 62% fines tumbled 19% since March 1, outpacing losses of 18.2% for 58% fines and a 15.8% decline in ore with 65% Fe content.

However, while the benchmark has fallen by a larger amount in percentage terms over this period, the price premium it commands over lower-grade 58% fines currently stands at an elevated 56.6%, well above the levels seen just a few years ago.

That price divergence can be seen in the chart below from the Commonwealth Bank, looking at the price premium for 62% fines over 58% fines going back to 2012.

Source: Commonwealth Bank

Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, says the widening price differentials between the two grades reflects recent attempts from Chinese policymakers to promote improved air quality in northern Chinese provinces over winter.

“The preference reflects a drive to reduce emissions and wastage among China’s steel mills,” he says.

“Those outcomes are increasingly becoming the focus for Chinese policymakers, particularly in northern China, where pollution levels continue to determine whether policymakers restrict industrial output.”

While some restrictions on Chinese steel production were lifted earlier this month, removing one of the pillars that encouraged mills to seek out more efficient iron ore grades to help improve productivity, Dhar says the price premium the benchmark enjoys over lower grades will likely remain elevated in the period ahead.

“While we expect that premium to pull back slightly from current levels, we believe the broad preference for higher grade ores is a structural change in the market,” he says. “China is looking to ensure cleaner air, which is consistent with the priorities of the Xi administration.”

Dhar sees the benchmark iron ore price falling to $55 a tonne by the December quarter, down from $64.33 a tonne at present, as seaborne supply outpaces demand.

And should the price premium over 58% fines remain around current levels, that could see the price for lower grades sink back towards the lows seen in late 2015.