High China Iron Ore Port Stocks Not the Whole Story

Not surprisingly, any discussion of iron ore prices in top consumer China inevitably involves some reference to import stock inventory.
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So when Reuters reports that the Dalian commodity exchange May iron ore contract price touched a low of 475.50 yuan per ton this week and China’s Qingdao port price dropped below $70 per ton — the lowest since Dec. 11 — analysts readily refer to record port stocks as being the cause.
Port inventory stood at 158.6 million tons at the end of last week, closer to the previous week’s record of 159.1 million times, according to a separate Reuters article. The article goes on to explain why headline port stocks are far from the whole story. China’s environmental crackdown on polluting industries this winter has driven steel mills to favor high-purity minimum 62% iron ore grades, supplied by firms like Australia’s Rio Tinto and BHP Billiton, Brazil’s Vale, and South Africa’s Kumba, over lower 58% Fe grades, such as Australia’s Fortescue Metals group and some Indian suppliers.
Much of the rise in import stocks has been a buildup of low-grade iron ore shunned by steel mills keen to avoid the pre-blast furnace upgrading needed for lower grades or the increased consumption of polluting coking coal that the protracted smelting of lower grades requires.

To underline how the market has favored higher grades this year, the price delta between 58% and 62% material has widened from the 29% gap that prevailed at the end of 2016 to a price difference this week of $68.78 per ton for the 62% and $40.36 per tonne for the 58% — about a 41% discount.
The import and consumption of higher-grade iron ore has been broadly steady, Reuters reports, while much of the port stock increase has been a buildup of low-grade material.
How, or if, this will resolve itself in 2018 remains to be seen.
One solution, Reuters suggests, would be for China’s pollution restrictions to be eased, allowing steel mills to use the lower-grade material. But that seems counter to the authority’s policy direction over the last 12 months and, therefore, unlikely.
The other, more likely option is that the discount for lower-grade ore will continue widening, Reuters reports, with the owners forced to accept heavy losses as a result.
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The steel market has been buoyant of late, as steel mills build stockpiles in anticipation of the construction season due to get underway with the spring weather. Stockpiles, however, are already quite high. Although rebar prices have picked up on the back of robust industrial output and fixed asset investment, figures recently released for the January-February period show gains have been modest as traders wait to see how many steel mills restricted during the winter season are allowed back on the stream.

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