China mills prefer lower Fe iron ore to cut costs

Struggling with poor margins on finished steel sales, Chinese steelmakers have increasingly sought out lower Fe grade imported iron ore fines to reduce their production costs, market sources observed, saying that this move has caused the price spread between medium- and low-Fe imported iron ore to narrow further.

The profitability of Chinese steel mills has been deteriorating over the past few months. Mysteel's latest survey results showed that only about 1% of the 247 domestic mills under its tracking could manage to earn some money during August 16-22, refreshing a new low since Mysteel launched the survey 12 years ago.

"Severe losses have led mills to cut steel production and focus on cost saving by consuming larger quantities of lower Fe-grade iron ore products that are available at lower prices," an iron ore trader based in East China's Shandong said, adding that the buying of medium- to low-Fe grade iron ore products was seen rising these days.

Chinese steel mills' poor margins when selling finished steel products were mainly the result of the slump in steel prices that also dragged down the prices of imported iron ore, a Shanghai-based analyst commented.

Nonetheless, with the stronger appetite for lower Fe iron ore among mills, the prices of low grade ore are proving more resilient than those of medium-Fe ore, sources said. This has resulted in the narrowed spread between the two products, Mysteel Global noted.

For example, prices of 56.5% Fe Super Special Fines and 61.5% Fe PB Fines at Shandong's Qingdao port were assessed by Mysteel at Yuan 610/wmt ($85.5/wmt) and Yuan 727/wmt respectively on August 22, both on CFR and including 13% VAT, with the spread between the two reduced to Yuan 117/wmt from Yuan 157/wmt a month ago.

Although Chinese steel prices have experienced a rally lately thanks to a brighter market mood, the financial strains on domestic steelmakers have only eased slightly as the previous decline was too steep.

Another Mysteel survey of ten integrated steel mills in Tangshan, the top steel producing hub in North China's Hebei province, showed that they still lost Yuan 284/t when selling steel billets as of August 21, though this was a small improvement from the Yuan 313/t loss they suffered a week earlier.

"In the near term, lingering losses will keep most mills cautious about ore replenishment, and lower Fe-grade iron ore products will remain their preference," the Shanghai analyst predicted.

Note: This article has been written in accordance with an article exchange agreement between MySteel Global and BigMint.