Iron Ore Lumps, Pellets in Vogue as China Scrubs Nasty Skies
LAGOS (Capital Markets in Africa) – The global iron ore market is fracturing and that means form matters more than ever. Alongside a push for better grades, which has reshaped pricing patterns, and shunning of impurities that hurt efficiency, mills are now paying more for raw material that comes in lumps and pellets.
“It’s not all about the grade of your product,” Macquarie Wealth Management said in a recent note that highlighted burgeoning investor interest in the trend. “Its form is pretty important too. The premia now being paid for lump and pellet versus the fines-basis is now touching record highs.”
The newfound focus on form is the latest manifestation of a market in upheaval, with consequences for miners in Brazil and Australia as well as users, especially in China. As with increased interest for high-quality ore that’s seen spreads explode, the main driving force behind the push for lumps has been Beijing’s drive to curb steel overcapacity and fight pollution. Ore in lump form doesn’t need to be sintered — the polluting process by which grainy fines are stuck together — can be fed direct into a furnace, and is more efficient.
“In a productivity-driven environment, steelmakers use iron ore with both superior chemical and physical specification,” said Alex Griffiths, senior research analyst at Wood Mackenzie Ltd. “Lump and pellet typically have higher chemical specifications than fines. Furthermore, lump and pellet hold their shape for longer under greater temperatures and pressures.”
Lump premium futures on the Singapore Exchange Ltd., which also trades the benchmark futures contract, have more than tripled this year, and were last at 34.5 cents per ton. SGX AsiaClear’s most-active benchmark ore was at $69.15, up from the year’s low of $62.24 in April.
Iron ore is typically traded in three forms, according to Macquarie Wealth Management. The most common is fines, which are like coarse, grainy sand and require either sintering or pelletizing before they’re used, it said. Lumps are small chunks of ore, while pellets are fines that’ve been processed into small beans, likened by one U.S. producer to resembling M&M chocolates.
In the push by mills in China for buying lumps or pellets made outside the country, Brazil’s Vale SA is among the winners. The miner produced a record amount of pellets in the second quarter, and said it’ll benefit from better pellet premiums this year, according to a production report.
In the lumps market, Rio Tinto Group and BHP Billiton Ltd. in Australia stand to gain. Rio said it benefited from “strong lump premiums” in the first half, with record lump sales in the second quarter. BHP said in its annual report its new South Flank project, being brought on to replace the aging Yandi mine, will see its overall proportion of lump rise to 35 percent from 25 percent.
China has been stepping up its campaign for blue skies by curbing steel production and other industrial activity, especially over winter. Earlier this year, authorities expanded the area that’s subject to controls, and analysts estimate that this season over half of the nation’s steelmaking capacity will be affected, compared with about a third last time around.
The campaign affects the lump market in two, complementary ways. The curbs have lifted steel prices, aiding mills profitability and boosting the incentive to use more lumps, and they’ve cut mainland sintering and pelletizing operations. WoodMac’s Griffiths noted that inspections in Shanxi province cut local pellet supply by about a fifth, pushing up value for imported cargoes.
As this year’s heating-season restrictions approach, lump and pellet premiums may rise further, according to Hui Heng Tan, a research analyst at Marex Spectron. There’s potential for a move upward “as profit margins remain firm, which means the chase for productivity remains firmly in place,” said Tan.
Source: Bloomberg Business News