Bulk Buys: Are iron ore grades going to get higher or lower? The narrative is confusing
The ASX’s largest standalone high grade iron ore producer remains confident a shift to greener forms of steelmaking will gather pace despite increasing shifts to lower grade iron ore in recent months.
The economic matrix of the steel sector has grown increasingly pragmatic in recent times as high grade premiums have cratered and low grade discounts have narrowed, driven by a need for Chinese steel mills to conserve cash amid a contradictory environment of solid demand and low prices.
Low stockpiles and steel demand in China outside the core property sector has kept prices of benchmark 62% Fe iron ore fines at surprisingly high levels of US$114/t.
But despite commentary from majors about looking to improve the share of premium products in their supply chains and up their overall grade, the reality is low grade supply has been stubbornly strong.
MinRes, for instance, will bring the lower grade 35Mtpa Onslow Iron operation online next year with the support of China’s largest steelmaker Baowu, a sign mills remain keen on product they can blend with higher grade they can tailor at the mill or port.
And even larger miners are having to be comfortable with supplying more low grade product. Rio Tinto (ASX:RIO) says changes to mine plans and delays adding brownfields expansions will mean its low grade SP10 product — essentially the product rejected from its flagship Pilbara Blend — will make up 13-15% of its shipments until it can develop the higher grade Rhodes Ridge mine in the Pilbara later this decade.
In a note to shareholders yesterday, Champion Iron (ASX:CIA) outlined the issues facing high grade iron ore suppliers like itself.
It produced 3.4Mt of magnetite concentrate grading over 66% Fe in the June quarter and is looking to ramp up annual output at its Bloom Lake complex in Canada’s Labrador region to 15Mtpa. It is also pursuing studies on developing a 69% Fe low impurity product for electric arc furnace and direct reduced iron steelmakers which could be among the highest premium on the planet.
But the short term outlook is cloudy.
“Champion’s vision continues to be confirmed with the wave of additional announcements of DRI/EAF steelmaking capacity. By contrast, premiums for high grade iron ore have recently been at multi-year lows,” CIA said.
“This weakness can likely be attributed to several factors, including: reduced emission controls in China amid diminished industrial activity; reduced steelmaking capacity across Europe, following the energy crisis, and impacting demand from a major seaborn consumer of high purity iron ore and pellets.
“Robust seasonal exports from Brazil, the largest seaborn supplier of high purity iron ore; and low steel mill profitability, resulting in reduced focus to optimise value-in-use in the steelmaking process.”
But logic dictates this reversion to old ways won’t last forever.
CIA thinks recent signals are supporting demand for high grade material.
Sintering restrictions in China which will drive a shift to pellet production are one factor, while lower energy prices in Europe have led to the recommissioning of idled European steel mills which use high grade feed.
There are also supply threats from the incoming Brazilian wet season, while a surge in coking coal prices could lead steel producers to prefer products which can limit the use of the fossil fuel in the furnace.
Using data from BMO Capital Markets, Michael O’Keeffe’s TSX and ASX listed miner says pellet and pellet feed material will make up 30% of the iron ore trade by 2030, eating 5% out of lump iron ore’s 15% market share and 10% from the dominant fines material, currently making up 60% of the iron ore trade and mostly sold out of the Pilbara.
Champion says direct reduced iron steelmaking nearly doubled in the past decade, hitting a total output of 127.36Mt in 2022.
While this is dwarfed by the conventional blast furnace route favoured in China and India, it says recent project announcements mean the green steelmaking technology is likely to see an acceleration in its uptake.
CIA thinks OEMs are likely to embrace premiums attached to green steel production, because the additional premium makes up only a small cost of the final product.
“In response to end users seeking greener steel, prominent steelmakers commenced imposing supplementary charges for steel made with reduced carbon footprints,” the company said.
“Notably, a major US-based steelmaker initiated a US$40/tonne surcharge for steel produced using DRI/HBI (hot briquetted iron). Likewise, a Nordic producer announced an anticipated €300/tonne (~US$330/tonne) premium for near-zero emissions steel.
“While such premiums may trigger additional expenses across supply chains, high-value products, such as automobiles and appliances, are estimated to experience price increments of less than 1%.
“As such, several well recognised consumer brands initiated agreements to embrace the shift to greener steel.”
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Another analyst has given a bullish view on coking coal prices, with Fitch unit BMI saying steelmaking coal’s H2 2023 rally could have more room to run thanks to strong demand in India and Japan.
Premium hard coking coal is paying around US$353/t, with BMI maintaining a year average forecast of US$295/t this year.
They expect prices to drop from current levels, but average US$300/t in 2024. With prices of US$200/t anticipated in 2027, US$20 above Bloomberg consensus, BMI expects prices to fall back but remain high by historical standards over the next four years.
“Australia premium hard coking coal prices are hovering around USD353/tonne at the time of writing on October 21, and we expect prices to have some more room to run before stabilising,” BMI says.
“That being said, we believe most of the rise in prices is now behind us.
“Prices have averaged USD288/tonne in the year-to-date, and we expect prices to end the year in the range of USD320-380/tonne.
“In 2024, we expect prices to average at USD300/tonne, as slowing steel production growth in importing nations (except India) will cap coking coal demand, and thus prices. That being said, we do not expect a full price collapse as supply will remain tight globally.”
The merits of coking coal and its sturdy future will be a point of debate at the Whitehaven Coal (ASX:WHC) AGM tomorrow.
The vote looms as D-Day for the company’s Paul Flynn and Mark Vaile led board. They should have the numbers to get their remuneration report across the line.
But they have faced shareholder discord in recent weeks and months despite a big vote of support from the market last week for a deal of up to $6.4 billion to buy BHP’s (ASX:BHP) Daunia and Blackwater mines in Queensland.
The acquisition will turn Whitehaven into the largest Australian met coal exposure on the ASX, with 70% of its revenues projected to come from the steelmaking commodity.
Its earnings have previously been almost entirely tied to thermal coal via its Maules Creek, Narrabri and Werris Creek mines in New South Wales.
Near 5% shareholder Bell Rock Capital, a London hedge fund, has started a campaign supported by proxy adviser ISS to have shareholders vote against the rem report after Whitehaven pushed back on its criticism of the BHP deal ahead of its announcement.
An actual rejection — founded on the allegation its incentive plan for executives including MD Paul Flynn favour growth over shareholder returns — is unlikely. But a 25% no vote could prompt discussions with big investors, given a second 25% ‘strike’ a year later would see the 2024 AGM become a vote to spill the miner’s board under current laws.
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