China Pollution Forcing Iron Ore Fines to Take Backseat to Lumps?

Australian and Brazilian iron ore is generally in lump form and of a higher quality than from sources like India, Iran or Mexico. So it is no surprise that the price of Australia lump, according to the FT, is fetching a premium of between $17 and $18.60 a metric ton over benchmark fines with 62% iron content.

We get into the short-term reasons for iron ore price weakness in Part One here.

Six months ago, the premium was at $8 a ton, while pellets with 65% iron ore content are trading at a premium of $40-$42 a ton to fines, up $10 in the same period. Likewise, domestically supplied Chinese iron ore is, although often at the top end of the price curve, in many cases of comparable lump grade quality.

If correct, a move to greater lump and pellet supply would therefore favor higher-priced domestic and Australian and Brazilian supplies, supporting prices as competition from other supplies was less attractive on quality grounds.

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So how significant has the move been so far?

The FT quotes a recent research report by Macquarie Bank that reported mills in Hebei, which account for about 40% of China’s steel production, were using 85% fines, 10% lump and 5% pellet in 2012.

It now thinks they are using a mix of 70%, 20% and 10%, respectively, a significant swing and more than enough to soak up additional supply from Rio Tinto’s and BHP’s expanded mines even if demand has leveled off.

What This Means for Metal Buyers

If Beijing maintains pressure on heavy polluters to reduce emissions, this trend is likely to continue during 2014 and could provide an unexpected support to iron ore prices as it favors the major producers who will look to match supply to demand in the interests of price stability.

Price falls may have to wait for a weakening in steel demand and a marked cutback in production, something that was expected in 2013 and didn’t materialize, and which, judging by early January production numbers from CISA, does not look imminent in China so far this year.

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