The iron ore market's big moment of change occurred as prices hit new decade lows, while quality-to-price differentials may return to widen and benefit Vale's higher Fe ores, according to the miner's head of iron ore.
The seaborne market is currently factoring in the exit of around 200 million mt of mainly lower iron content and higher impurity laden ores from smaller producers, as well as in China, Vale estimates.
This has been replaced by greater quantities from Australia to now, and the trend has held up relative prices for lower Fe ores while not accounting for the previously seen sizable premiums for high Fe fines and concentrates, Peter Poppinga, Vale's executive director of ferrous minerals told reporters Friday.
Vale will adapt the sale of its high Fe ores, blending into products such as BRBF fines to meet requirements from customers, while at the same time reducing exposure to the lower premiums being paid out currently for higher quality materials, he said.
Vale is tight-lipped around the outlook for iron ore prices, but pointed out its blending capabilities in Malaysia and China, as well as expanding use of large VLOC vessels, will allow for efficiencies and better management of its ore resources and costs.
"There are two micro trends; the market doesn't need productivity, and 200 million mt have exited, of low quality ores," Poppinga said.
"The discount for low quality ore is going down. Mid-term the market will balance out to a normal situation for high grade ore to get higher premiums than the situation today."
Vale's Brazilian Blend Fines (BRBF) are typically 63.5% Fe with 4.5% silica, compared to Vale's flagship Carajas fines of 65% Fe and 2.1% silica. Since introducing BRBF mid-year, Vale is looking to ship 20 million mt of the blended product through year-end, and ramp up volumes further.
Vale saw several blast furnace closures compounding the overall usage of lower quality materials, especially in China, over demand for higher quality ores typically seen in Europe and other markets.
As it invests in new mining and processing capacity at low cash costs, the global iron ore mining cost curve will see further investment on a quality adjusted basis at a higher cost to Vale's mines, Poppinga said. This will allow the relationship of premiums for higher grade ores to be re-established in the medium term, he said.
Steelmaker productivity may be harder to influence from the mining side, and with higher steel margins yet to establish themselves, steelmakers earlier eyeing the expansion of Carajas capacity peaking in 2018 may still feel this is a game changer for high Fe premiums.
Platts iron ore assessments for 62% fines, 65% fines and 58% low alumina fines in November showed the narrowest price differential between the iron ore grades since monthly averages across the three indices were published two years ago.
The differential across 58% Fe-65% Fe was worth $7.483/dry mt in November, equivalent to 16.1% of the price around IODEX 62% Fe, down from a peak of $26.378/dmt in December 2013, with the largest percentage range around IODEX seen at 27.3% in June 2014.
Lower Fe grade iron ores around 58% Fe may be better suited to an environment in which steel is in oversupply and as blast furnace coke prices fell through the year, helping reduce silica penalties, according to a October 19 note from Minerals Value Service. MVS is a specialist analytics unit of Platts.
Using MVS' proprietary Blend Analytics sophisticated heat and mass blast furnace model against market prices and trends, research concluded steelmakers may be giving up efficiencies and higher Fe ores amid reduced capacity and profitability.
"Relatively lower Fe grade ores (58% Fe) appear to have found their place in the burden mix. They may currently be utilized as a relatively cheap feed, keeping the blast furnace operational whilst producing minimal steel output in an oversupplied environment," wrote Alex Griffiths, MVS senior analyst.
Markets are yet to move towards Vale's view. On Monday, IODEX was assessed
at $39.50/dmt CFR China, down 10 cents from Friday, with the 65% Fe index slipping a higher proportion 20 cents to $42.30/dmt. Applying the Platts Mid Range 1% Fe differential gives 65% Fe an iron content adjusted addition of 55 cents.
