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The 65%-62% Fe spread, an indicator of the price difference between high- and medium-grade fines, has gradually widened in recent days following some volumes of Brazilian Iron Ore Carajas (IOCJ) changing hands in the spot market, but the upside could still be capped by weak production margins, market sources told S&P Global Commodity Insights Oct. 18.
The price spread had fallen to a multi-year low of $7.85/mt on Sept. 29, the lowest level since August 2020, but has since rebounded to $9.5/dmt Oct. 17, according to S&P Global data, amid pockets of buying appetite for high grade fines.
“Demand for IOCJ improved by a bit; mills need some high-grade fines to blend with the low grade fines [they purchased earlier],” a Singapore-based iron ore trader said.
Two deals of IOCJ with an aggregate volume of 170,000 mt were seen concluded over the past week, both on an outright price basis from Ponta Da Madeira to Qingdao.
Other factors including buyers’ procurement cycle, delivery timings and margins were also key considerations for those seeking higher Fe content fines.
“Some mills have the appetite for higher grade fines now, with landing margins and positive import margins,” a China-based mill source said. “In addition, the delivery timing and requirements for seaborne cargoes may be more appropriate for some.”
Seaborne iron ore prices have proven to be more cost competitive than port stock prices for more than four straight months now, indicating positive import margins, thereby adding some weight to domestic purchases.
The China-based source added that this could be why despite ample stocks at portside for IOCJ, demand for seaborne cargoes is resilient.
A second China-based iron ore trader surmised that some mills could have turned toward signing long-term contracts for domestic IOCJ amid sluggish margins, thus demand for spot cargoes could sporadic, indirectly leading to higher stockpiles seen.
“The stock level [at portside] looks high but not many of them are tradeable cargoes,” another China-based iron ore source said. “Mills need to use the cargoes for blending and they might not resell the cargoes to the spot market.”
On the supply front, there has been no tightness seen for the Brazilian high grade material.
Despite poor weather conditions expected in the fourth quarter, loading for spot IOCJ cargoes is unlikely to be affected, sources said.
There was an increase in production level at the S11D mine in northern Brazil and an uptick in third-quarter sales for iron ore fines, according to the latest quarterly report from Vale.
Market participants attributed the slight widening of the 65%-62% spread more to improvements in demand-side factors rather than any expectations of supply tightness.
However, diminished steel mill margins have pivoted the Asian iron ore market toward low and medium Fe content sintering feedstocks in recent months, hence the upside on the 65%-62% Fe spread could be capped, sources said.
“Cargoes with higher discounts, low and medium grade in content are the key feedstocks by mills,” a China-based buyer said.
Sluggish downstream HRC and rebar margins have also driven mills away from high Fe fines.
“The current spread of $9.50-$10/dmt is reasonable,” a China-based iron ore trader said. “With the low margins, mills may focus more on lower Fe content.”