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Stockhead – The discount for low grade iron ore is growing; how long before it is baked in?

12 January 2022


Economic cycles that see low grade iron ore producers compete on price with high grade miners could become a thing of the past as China gets serious on emissions reductions, an iron ore pricing expert says.

Spreads have been rising between high, mid and low grade iron ore fines in the past six months in volatile market conditions, with discounts nearing the levels seen in 2017 and 2018.

The widening gap impacted earnings for Fortescue Metals Group (ASX:FMG) and Mineral Resources (ASX:MIN) in the September quarter.

While the gulf between prices paid for 58% iron ore fines and 62% benchmark iron ore was as narrow as 11% in late 2020, the differential has blown out to around 40% by the start of this year, according to data from Fastmarkets MB.

On Friday, 62% iron ore was fetching US$128.03/t, with 58% fines going for US$77.21. At US$154/t, 65% iron ore fines were trading at a 17% premium.

Fastmarkets senior price development manager Peter Hannah said traditionally price differentials had ebbed and flowed with mill profitability and coking coal prices.

But he said a structural trend away from low-grade ores was developing.

“Those grade differentials do always tend to be somewhat cyclical. But even so, I’m not convinced that we’re going to see conditions again that really favour low grade prices like we have in the past,” he told Stockhead.

“With China now taking much more of a long term, stricter stance on the environment, and also with a willingness to impose production curbs on mills, rather than seeing margins get crushed, like they have in the past.

“So low grades do very well when mill margins are really low, there’s overcapacity in the system and there’s weak environmental restrictions. And that combination of factors I’m not convinced is going to be seen to the extent in the future as it has in the past.”

The 58-62% differential — which peaked briefly in both 2017 and 2018 at 46% — is near all-time records, with short term factors also at play.

“You’ve got healthy mill profit margins, high coke prices, and seasonal anti-pollution restrictions,” Hannah said. “So mills right now have got both a profit incentive, as well as cost and compliance concerns that are motivating them to moderate their consumption of low grade ores.”

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