China's capacity rationalisation program means that margins will not return to the low levels seen prior to 2016 supply-side reforms. Better margins will continue to support iron ores with superior chemical properties.
2) A shift to bigger blast furnaces.
Part of China's efficiency drive is to encourage steelmakers to swap smaller blast furnaces for bigger ones. Bigger furnaces are cheaper to run per tonne of hot metal produced and are more likely to be environmentally compliant. In making this change, two key factors support long-term demand for premium steel making raw materials. They are:
- Bigger blast furnaces produce less hot metal per unit volume. To bridge the productivity gap, steelmakers seek raw materials with superior chemical properties.
- Raw materials fed in to bigger furnaces have to endure greater temperatures and pressures and for longer than in smaller furnaces. To ensure the burden mix stands and the furnace does not seize up, raw materials with superior physical qualities are required.
… but supply stagnates
Of course, price is not just a function of demand, but also of supply. And supply for premium iron ores is not rising as fast as demand.
Minas Rio – a relatively new entrant to the top end of the iron ore market – has suffered setbacks, meaning it will not produce any more high-grade ore until next year. Samarco, a major supplier of high-grade pellets, remains offline with no word on a start date. Potential new sources do exist, but given that premium iron-ore operations typically require beneficiation and extra processing, costs are a significant barrier to new entrants.
Vale is the only one of the big four iron ore producers that specifically caters to the premium section of the market. Vale is certainly taking advantage of the current premiums – the company is producing record tonnages and opening long-idled pelletising facilities in Sao Luis and Tubarao.