Iron ore prices diverge as China's top steel city announces new smog alerts

Welcome to Tangshan!
  • Iron ore spot market finished mixed on Friday. Lower grades were hammered for a second consecutive session.
  • There are clear signs that Chinese steel production is slowing, as is generally seen at this time of year. Steel mill utilisation rates are falling as are Chinese iron ore imports.
  • Tangshan, China’s top steel production hub, announced second-level smog alerts last weekend, triggering even tougher production curbs over the remainder of 2018.

Iron ore spot markets diverged on Friday with modest gains in higher grades masking weakness in mid and lower tiers.

According to Metal Bulletin, the price for benchmark 62% fines dipped 0.1% to $66.51 a tonne, adding to the 1.2% fall recorded a session earlier.

After outperforming earlier in the week, lower grades were crunched again with the price for 58% fines tumbling 1.5% to $41.83 a tonne. It had fallen 2.1% on Thursday.

In contrast, more efficient grades ticked higher with 65% Brazilian fines settling up 0.1% to $82.80 a tonne.

The resilience in more efficient and higher cost ore came despite weakness in Chinese steel futures on Friday, partially reversing gains seen earlier in the week.

Iron ore spot markets have been particularly sensitive to Chinese steel mill profit margins in recent months, falling sharply in early December as average profit margins turned negative.

However, rather than been driven by profit margins, the strength in higher grades may have been sparked by further signs of a slowdown in Chinese steel production in early December.

According to data from Mysteel Consultancy, utilisation rates at Chinese steel mills fell 0.83 percentage points last week to 65.88%, suggesting that curbs introduced in November to help improve air quality in northern Chinese provinces over winter are leading to weaker steep production and, potentially, an increase in profit margins in the period ahead.

In the past, mills have favoured more efficient ore to help maximise yields during periods when environmental restrictions have been implemented.

Mirroring the fall in iron ore prices and steel mill utilisation rates in recent weeks, Chinese iron ore imports continued to decline in November, according to data released by China’s General Administration of Customs last weekend.

86.25 million tonnes of iron ore was imported, down 2.4% from October and 8.8% from the same month a year earlier.

So far this year, China has imported 977.89 million tonnes of iron ore, down slightly from 991.26 million tonnes in the same period the previous year, according to calculations from Reuters.

Providing few indications as to what direction spot markets will travel on Monday, Chinese steel and bulk commodity contracts closed mixed on Friday evening.

SHFE Hot Rolled Coil ¥3,656 , 0.41%
SHFE Rebar ¥3,685 , -0.86%
DCE Iron Ore ¥513.50 , 0.79%
DCE Coking Coal ¥1,435.00 , -0.21%
DCE Coke ¥2,355.50 , -0.46%

The January 2019 rebar contract fell from 3,714 yuan on Thursday evening while all other contracts, including iron ore in Dalian, edged higher over the same period.

After futures markets shut for the week, government officials in Tangshan, China’s top steel making city, announced on Saturday second-level smog alerts, triggering measures to reduce air pollution in December.

Steel mills in the smog-prone city will need to shut their sintering capacity by 30-60% or even shut down based on their emission level, while coke plants must extend production time in order to churn out less dust, Reuters said.

Companies in construction materials, pharmaceutical, cement and mining industry were also asked to enforce emergency measures.

The order came as the government forecast several bouts of smog to hit norther provinces over the remainder of the year.

Previously, tighter production levels have often led to substantial gains in Chinese steel futures, along with bulk commodity contracts, despite the potential for reduced demand for raw materials.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.