Higher grade iron ore falls again as steel futures slide

Pascal Parrot/Getty Images
  • Iron ore spot markets diverged on Friday with gains in low and mid-tiers masking continued declines in more efficient, more expensive ores.
  • The price for 65% Brazilian fines fell to the lowest level since late August, coinciding with renewed weakness in Chinese steel prices.
  • Westpac Bank says higher grade ore is being impacted by lower Chinese steel mill margins and the increased use of recycled steel.

Iron ore spot markets closed mixed on Friday with gains in low and mid-tier grades masking continued weakness in more expensive, more efficient ores.

According to Metal Bulletin, the spot price for benchmark 62% fines rose by 0.5% to $75.31 a tonne, partially reversing a steep 1.3% decline recorded a session earlier.

The price of 58% fines also rallied, jumping by 1.1% to $45.23 a tonne.

The price of 65% Brazilian fines went in the other direction, sliding 0.3% to $94.40 a tonne, leaving it at a three-month low.

“Higher grade ore premiums are moderating due in part to falling steel prices,” says Justin Smirk, Senior Economist at Westpac Bank. “With metallurgical coal prices rising, steel mill margins are been squeezed, increasing the attractiveness of cheaper grades of ore.”

Along with lower profit margins for Chinese steel mills, Smirk says prices for higher grade ores may also be pressured by the increased use of steel scrap in China.

“Recycled steel scrap was the basis for 19.5% of Chinese crude steel output in the first half of 2018, a significant five percentage point jump in the year,” Smirk says, citing data from the China Association of Metal Scrap Utilisation.

“By using scrap, a pure source of iron, mills can increase their use of cheaper, lower grades of ore.

“The rising use of scrap represents a clear medium term risk for iron ore demand, and thus prices, with the only limiting factor being the availability of scrap.”

The weakness in higher grade ores coincided with a pullback in Chinese steel futures on Friday.

Rebar futures in Shanghai finished the day session at 3,884 yuan, below the 3,942 yuan level it closed on Thursday evening. Hot-rolled coil futures also softened, ending the day at 3,624 yuan, below Thursday’s night session close of 3,643 yuan.

Having surged on Thursday evening on hopes of less-onerous steep production curbs over the Chinese heating season, iron ore, coking coal and coke contracts consolidated upon those gains during Friday’s session.

Iron ore and coking coal finished the session at 521 and 1,385 yuan respectively, just below Thursday’s night session close of 523 and 1,389 yuan respectively.

As seen in the scoreboard below, similar trends were also evident in trade on Friday evening with steel futures continuing to weaken while bulk commodity contracts remained firm.

SHFE Hot Rolled Coil ¥3,610 , -0.47%
SHFE Rebar ¥3,852 , -1.51%
DCE Iron Ore ¥519.00 , 0.00%
DCE Coking Coal ¥1,387.00 , 0.07%
DCE Coke ¥2,413.00 , 0.21%

The mixed price performance offers no real clues as to what direction spot markets may travel on Monday, although the weakness in steel futures suggests there may be further pressure on higher grade iron ore.

Trade in Chinese commodity futures will resume at midday AEDT.

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.