Are BRBF iron ore premiums on the road to recovery in 2019?

Premiums for Vale’s Brazilian Blend iron ore fines (BRBF) against the S&P Global Platts’ 62% Iron Ore index went on a roller-coaster ride in 2018, hitting a peak of $7.5/dmt premiums in the first half of 2018, before plunging to current levels of $2.50-$3/dmt.

Market sources pointed to strong demand for BRBF in the first half of the year due to more stringent environmental controls and an overall structural shift in Chinese steel production favouring the usage of higher grade fines.

As part of the Chinese government’s aim to lower air pollution levels, low alumina fines were in high demand as less coke is needed for steel production, resulting in lower pollution levels. The high Fe content of BRBF as compared to other medium grade fines meant that mills with larger blast furnaces were actively procuring it given the preference for more efficient raw materials.

From January to May 2018, a total of about 9.5 million mt of BRBF was exported out of Teluk Rubiah, an increase of around 8.9% over the same period in 2017, and a decrease of around 2.2% from August to December 2017, a source said. However, there was a total net volume decrease of 1.9 million mt in BRBF stocks at Teluk Rubiah, compared to a decrease of 112,000 mt over the same period in 2017, and a surplus of 220,000 mt over August to December 2017, indicating a sharp decrease in BRBF supply, the source added.

Demand for BRBF along with higher grade fines dipped on falling steel margins among Chinese steel mills in the 4th quarter of 2018.

According to Platts Analytics, the average rebar margins declined from $160/mt in mid-2018 to $29/mt by the end of November. Over the same period, HRC margins fell from $170/mt to $15/mt. With a general atmosphere of more relaxed pollution controls during the end-of-year heating season, mills were not incentivized to continue their utilization of higher grade and low alumina fines, and shifted their preference to lower grade fines.

The alumina differentials have followed a similar path with the 1% alumina differential rising to a high of $8.7/dmt on July 17, 2018, before steadily declining to $1.9/dmt on December 27, a level similar to that at the start of 2018.

With rebounding steel margins towards the end of 2018 providing support for strong iron ore prices, will demand for BRBF pick up again in 2019?
Early 2019 – new opportunities for BRBF?

Moving into 2019, BRBF’s liquidity has seen a steady improvement due to a fundamental need for low alumina fines, along with recent changes to the blend ratios of raw feedstock for the blast furnaces.

Many mills had actively procured cheaper iron ore fines late last year after a severe weakening in steel margins, resulting in stronger demand for discounted products like Jimblebar fines (JMBF). With typical specifications of 61% Fe and 3% alumina, JMBF traded at a discount of over $10/dmt against the front month index in late September 2018 before strengthening over Q4 to a discount of around $6/dmt in early January this year.

The increasing usage of JMBF has led to a higher need for low alumina fines to maintain the current alumina percentage in the blast furnace. Many end-users have pointed to the typical 1.5% alumina content of BRBF as ideal for blending with JMBF.

“When steel margins started falling, a sintering mix of high grade Carajas cargoes with low grade fines of Fe content lower than 60% was a cost-effective alternative to PBF. However the wide spread between high grade and medium grade fines throughout the year made it unaffordable to using more high grade cargoes. With BRBF’s premiums lowering, utilizing it to blend with JMBF became an optimal choice,” a steel mill source said in December 2018.

Although end-user demand weakened for BRBF in the second half of 2018, its narrowing spread with PBF (Australian Pilbara Blend fines) has made its usage feasible once more. In December, BRBF cargoes were trading around $2-3/dmt over IODEX, dropping from the previous high levels of $7.5/dmt. In comparison, the premium for PBF remained at around $1-2/dmt throughout the same period.

As a result of this narrowing spread, there were end-users willing to replace certain amounts of their PBF with BRBF given its higher Fe content as well.

The fundamental demand for low alumina fines is likely to be highlighted by an increase in alumina content for medium grade Australian fines as well as lesser low alumina alternatives.

BHP’s Newman fines (NMF) had an increase in typical alumina content from 2.25% to 2.3% on August 1 2018, and up to 2.4% on January 1 2019. Rio Tinto has managed to stabilize the alumina content of its PBF at 2.3% by selling one of its raw components, RTX fines, separately. In comparison, the quality of BRBF blended at Teluk Rubiah has maintained a steady quality with its sintering performance being increasingly sought after.

Low production of domestic concentrates has resulted in many Tangshan mills looking for alternative low alumina replacements. In early 2018, China reduced the production of domestic concentrate by around 50% in line with environmental regulations, resulting in reduced production capacity for most of the year.

Domestic concentrate production was further lowered in Q4 2018 on a seasonal cycle, strengthening demand for low alumina raw materials.

Moving forward in 2019 – supply may be potential limiting factor

Amid existing driving factors for stronger demand for BRBF, market sources have indicated that it is unlikely that premiums will again reach high levels of over $7/dmt due to a number of reasons.

Higher BRBF supply in 2019 is likely to set a cap on premiums for BRBF, especially with the increasing availability of port-blended BRBF at Chinese ports. Although the specifications are inferior to Teluk Rubiah’s BRBF, many end-users will utilize it if prices are low enough.

Platts observed that the spread between BRBF and PBF at Caofeidian port has narrowed from Yuan 55-60/wmt in July to a range of parity to 5-10 Yuan/wmt in December. For many northern Chinese mills, port-blended BRBF offers a lower cost low alumina option.

Steel margins and profitability of end-users will be the decisive factor on whether strong demand for BRBF can be sustained. As a higher grade product that does not form the bulk of a blast furnace raw feedstock, its utilization is price sensitive as procurement patterns in 2018 have demonstrated.

Currently, sales for other Brazilian higher grade fines have not picked up significantly and market participants expect this trend to continue through the winter.

Stringent control over environmental pollution will remain as a major shaping factor of the steel industry in 2019. As such, mills will have a certain inelastic demand for more efficient raw materials.

“There is always demand for low alumina raw materials, but mills will be inclined to choose lower cost alternatives and blend ratios given current weak steel margins. Demand for higher grade fines like BRBF will pick up if there is a period of constant steel margins where mills feel confident enough to ramp up steel production,” an eastern Chinese mill source said.
Source: Platts