CRU: The High-grade Iron Ore Premium Has Peaked

Since then, the premium has inched down to just above 30%. CRU's analysis shows that the premium for high-grade has peaked and is likely to be contained in the 20–30% range in the coming years.

CRU has identified three key factors that have a direct impact on how steelmakers, particularly in China, value high-grade iron ore. All three factors point towards the same outcome, that the high-grade premium has already peaked, but will sustain at levels above those observed prior to 2017.

More high-grade supply on the way

In 2019, supply of high-grade iron ore is set to improve after a year of two major supply disruptions, the strike at IOC and Minas Rio's pipeline leakage. CRU has also identified three projects, with a combined capacity of 14 Mt, that have returned to the market as a result of the elevated premia in recent years. In addition, key high-grade suppliers such as Vale, CITIC Pacific, IOC and Minas Rio are expected to ramp up production and put an additional 50 Mt/y of high-grade supply onto the seaborne market in the coming years. As a result, CRU expects seaborne supply of high-grade (i.e. equal to or above 64% Fe) iron ore fines, concentrate and pellet feed to increase by 5% per year until 2022. Besides these confirmed projects, according to CRU's Iron Ore Supply Database, there are a number of possible high-grade projects that could come online and add as much as 100 Mt of supply to the seaborne market in the coming decade.

Profitability in the Chinese steel industry to fall

One key driver of high-grade iron ore demand is the profitability of the Chinese steel industry, a market responsible for ~70% of seaborne iron ore imports. Strong margins incentivise steelmakers to ramp up production, which means blast furnace (BF) productivity becomes paramount. One way to optimise BF operations is to increase consumption of high-grade ore. This allows increased productivity through the ability to produce stronger sinter that can improve the permeability of the BF blend.

Read the full story: https://www.crugroup.com/knowledge-and-insights/insights/2018/the-high-grade-iron-ore-premium-has-peaked/

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