Iron ore price spread between low and high grades to remain wide

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Since China started to rationalise its steel capacity in 2016, the price spread between low-grade and high-grade iron ore has widened substantially. In addition, low-grade ore discounts have become more sensitive to steel margins than to coke or coking coal prices. We have established a model to quantitatively explain why these trends are happening and how they will progress in the future. Based on the model results, we expect the long-term discount for low-grade Fortescue Metals Group Super Special Fines to be 24% and the premium for high-grade Vale Carajas fines to settle at 20%. Our forecast price spreads are narrower than today's spot spreads of more than 30%, but wider than the 10% to 15% price spreads that prevailed before China's steel supply-side reforms began in 2016.

Table of contents

  • Executive summary
  • Discounts and premiums for various iron ore grades
  • Productivity isthe key driver of iron ore price spreads when steel margins are high
  • Steelmaking costsbecome less of a factor determining iron ore price spreadsas steel margins rise
  • Price spreads to narrow but remain wider than before China's steel industry rationalisation
  • What about supply?

Tables and charts

This report includes 12 images and tables including:

  • Discount of FMG SSF to PB fines (%)
  • Premium of Vale Carajas fines To PB fines (%)
  • Sensitivity of discount for FMG SSF to coke price and rebar price (%)
  • Sensitivity of premium for Vale Carajas fines to coke price and rebar price (%)
  • Ironmaking average productivity (tonne hot metal/employee-year) from various iron ore
  • Rebar average productivity (tonne rebar/employee- year) from different iron ore
  • The conversion cost (RMB/t hot metal) for low-grade ore is higher (April 2018)
  • Low-grade ore requires more flux and more coke breeze in the sintering process (kg/t sinter)
  • Low-grade ore consumes more sinter and coke in the ironmaking process (kg/t hot metal)
  • FMG SSF discount may be sustained for the next two years and then fall
  • Vale Carajas fines premium may be sustained for the next two years and then fall
  • The changing composition of ex-mine seaborne supply

What's included

This report contains:

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    Iron ore price spread between low and high grades to remain wide

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