Penalties for alumina and silica content in iron ore have soared since January this year, due to a resurgence in the supply of ores with higher impurities and a subsequent lackluster response in demand. In the medium grade iron ore fines bracket of 60%-63.5% Fe, Platts assessed the 1%-silica penalty at a historical high of $4.80/dmt Friday for the silica band 4.5%-6.5%. This assessed penalty has almost doubled on the month, reaping an increase of $2.50/dmt from May 22. From the start of the year, this assessment has soared $2.90/mt.
For alumina, the penalty per 1% alumina stood at $1.50/dmt Friday, for the alumina band between 1%-2.5%, for medium grade fines. This was also a leap from the $0.35/dmt assessed at the start of the year.
A recovery in seaborne iron ore prices in the last quarter of 2016 and most of Q1 2017 prompted the resurgence of global swing supply, resulting in a multitude of ores with varied specifications searching for a home in the largest steel-making hub, China, sources said. Import volumes for Mauritanian iron ore into China, with silica content around 8.5%-9.5%, increased by almost 24% in 2016 compared with a year ago. Similarly, volumes for Sierra Leone iron ore, with alumina content around 6%, increased by 60 -- although the West African country's mining operations and loading were hampered by the Ebola outbreak from 2014 to March 2016.
Moreover, Indian origin iron ore resurfaced to the global market, following the government's relinquishment of 30% export tax for iron ore with Fe below 58% in March 2016.
With operationally ready infrastructure, India's iron ore exports to China leapt from a meager 2.08 million mt in 2015 to 15.6 million mt in 2016. India's iron ore, particularly of lower Fe content, typically has silica content in the range of 5%-5.5%, while alumina could span as high as 5%.
Mainstream medium grade Australian iron ore tends to be closer to 4%-4.5% and alumina is circa 2.5%.
This was also in addition to a restart of domestically available Chinese iron ore concentrate supply, which also tends to have relatively higher silica content of around 5%. Over January-April 2017, Chinese iron ore concentrate supply increased by 18.4% on the year to 80.8 million mt, according to figures released by China's Metallurgical Mines' Association.
As a result of the influx of high impurity ores, competition to get a buyer has been difficult and material with higher impurities has been heavily penalized, sources said.
"High impurity ores have been difficult to offload," an eastern China trader source said.
"A lot of high silica cargoes have come back onto the market," a supplier said.
Inherent in the unpopularity of these high impurity ores is the strong steel margins enjoyed by Chinese mills, who prefer to maximize blast furnace productivity, and enjoy the profits for however long the sun shines.
"We used to be able to procure ores with silica content of around 6.5%, but now we can only take in ores of less than 5.2%," a Hebei-based mill source added.
This contrasts to 2014 and 2015 when mills struggled to make margins and domestic concentrates were in short supply due to uncompetitiveness, and the silica penalty was negligible.
"There was a period of time when silica was welcomed by the Chinese mills, particularly as their blast furnaces were configured to take on a higher silica burden from local concentrate supply, to produce the right amount of slag," an international trader also said.
Part of the explanation for lackluster demand for these high impurity ores is the unexpected increase in scrap burden in the basic oxygen furnace, sources said.
Scrap feedstock had emerged as an economical alternative to fines, with plentiful availability from the culling of unauthorized induction furnaces in China in late 2016.
While using more scrap should increase the tolerance for high silica ores as scrap tends to be of extremely low silica content, sub-0.5%, the overarching quest for blast furnace productivity to maximize margins trumped all impurity sensibilities, sources said.
"It makes no sense to decrease silica in hot metal inputs to balance out an even lower silica content found in the basic oxygen furnace. This impurity penalty is just the typical [mill] reaction to realize a better margin," a second supplier added.
Faced with multiple options across a variety of iron ore brands, the displacement of fines as a feedstock was unequal, depending squarely on quality and specifications.
This is evident in the unprecedented wide premium for high grade, low impurity ores, with Platts 65% Fe assessment coming in at 18% premium to IODEX, averaged over the month of May 2017. Comparatively, the same spread was only 9.3% in May 2016.
"If you take on very high silica ores, you will have to get very low silica ores to blend -- these are scarce and expensive. The solution is to procure the medium silica ores and save yourself the trouble," the Hebei steel mill added.
At the same time, market participants were actively monitoring the potential clearing of swing producers, following the correction in iron ore prices since the start of the year.
IODEX average for the month of May stood at $61.55/dmt CFR Qingdao, down from the $88.72/dmt clocked in February 2017, which was also a 31-month high.
"Chinese mills are agile, and will optimize their blast furnace mix to suit market conditions," a second Hebei-based mill source said.
