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

Insight 16 May 2018

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Report summary

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.

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 the following images and tables:

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