Restocking, steel curbs drive China's portside prices

A seasonal slowdown in Chinese steel demand, Winter Olympics-related output curbs, restocking ahead of the lunar new year holiday and supply fluctuations will be the drivers of portside iron ore prices this quarter.

The Argus PCX 62 portside index month-to-date average is 818 yuan/wet metric tonne (wmt), down by 28pc from January 2021. The average is up by 9pc from December's Yn748/wmt. The index hit a three-year low at Yn574/wmt on 19 November last year.

Landing margins for mainstream cargoes have been negative since early December, although losses have narrowed recently from Yn25-35/wmt to Yn15-20/wmt. "Mining Area C Fines (MACF) and Jimblebar Blend Fines (JMBF) have positive landing margins of Yn5-20/wmt now. The shrinking losses and expectations of pre-holiday restocking encouraged more traders to take positions on cargoes, bolstering portside prices," a Shanghai trader said.

The Argus PCX 62pc portside fines index fell by Yn1/wmt from the previous day to Yn829/wmt free-on-truck Qingdao on 7 January, with its seaborne equivalent down by $0.20/dry metric tonne (dmt) for the same period to $120.55/dmt cfr Qingdao.

Stocks diverge

Portside stocks at 45 main Chinese ports hit 156.25mn t on 31 December 2021, up by 27.4pc from 122.67mn t at the beginning of the year and rising to a three-year high, market participants said. Stocks have stayed high this month, although inventories held by steel mills remain subdued. The 45 ports had 156.05mn t as of 7 January, down by 205,500t from a week earlier. Intense steel output curbs, especially from July and August last year, and power rationing measures contributed to the stockbuild.

"The market still has uncertainties, so we choose to keep low inventories of around 10 days and just buy for rigid demand," a Henan mill buyer said.

"In the third quarter, the increase was more obvious in high-grade stocks as mills' margins squeezed, with other grades seeing a milder rise. Only JMBF stocks dropped as it was cost-effective over that period," an east-China based trader said.

The portside inventory structure changed with steel mills' margins recovering from last November.

Medium and high-grade stocks fell, while those of low-grade ore and non-mainstream brands accumulated. "The proportion of Brazilian iron ore at ports fell from 32.9pc at the beginning of 2021 to 28.4pc in July and rebounded to 35.7pc by the end of the year," an east-China based mill buyer said. "Demand for Brazilian iron ore with high silica slowed down with the surge in coke prices."

Brazilian stocks current are around 35.5pc, market participants said. January-March is typically the rainy season in Brazil and so imports from the country usually come under pressure.

Portside outlook

Steel production curbs at north China are expected to be stringent in February when Beijing hosts the Winter Olympics. "As winter is the traditional off-season for steel consumption, demand in the period for iron ore and steel would remain sluggish," a Hebei mill buyer said.

"Our procurement will focus on discounted medium-grade like JMBF, MACF and SP10 fines, along with local pellets to balance our costs," a north China mill said. "The cost of using BRBF is much higher than separately using IOCJ and crude fines with high silica," it added.

Sintering curbs in China are also pushing up demand for direct-charge materials. "Our current lump ratio is 15pc and if the margins improve further, we can raise that by another 5pc," a north China mill buyer said.

The CME Group today launched two iron ore futures contracts that are settled on a Argus PCX 62pc yuan/wmt and its US dollar equivalent basis. The contract had traded 40,000t across five trades by 5.15pm Singapore time. The February month contract traded at Yn831/wmt and at Yn812/wmt later in the day, while the March contract traded at Yn829/wmt.

"The contract will allow participants to hedge their portside stocks and also trade the portside-Singapore Exchange (SGX) spread," a trader said. "This is already possible using the Dalian Commodity Exchange (DCE)/SGX spread but the DCE price is typically reflective of lower grade Super Special Fines," he added. The CME contract will track the physical mainstream mid-grade segment, in line with the specifications of the underlying index.

The seaborne-portside spread is an indicator of the relative demand strength between prompt or portside and dated or seaborne iron ore. The spread between the Argus PCX US dollar equivalent and the seaborne ICX was $7.75/t on 7 January, the lowest since 20 December 2020.

The launch of the derivative will also provide for the evolution of a forward curve for the portside market, allowing for a gauge of current spot market conditions and participants' outlook. A forward curve exists currently with DCE iron ore futures. But it provides limited options to align futures with physical trades and associated cargo deliveries as liquidity is concentrated to January, May and September. The May futures contract is currently the most traded on the DCE.