Capesize

17950

Sep-17
0.00 0.00%

Panamax

11175

Sep-17
225.00 2.05%

Iron Ore

76.5

Sep-17
0.85 1.12%

Sing 380

278.25

Oct-17

Coking Coal

208

Sep-17
0.00 0.00%

Nola Urea

212.5

Sep-17
0.00 0.00%

FIS Market Review – Boom time for iron ore futures


Iron ore futures rocketed to a five month high this week, as traders rushed to transact before new rulings imposed by the Dalian Commodity Exchange (DCE).

Therefore, the iron ore futures saw a gain more than 6% on Monday, rising for a third trading consecutive day after the recording growth of 7% on Friday session. The exuberant gains coupled with high gains of steel prices have placed spot iron ore prices once again to “unsustainable” high levels toward USD80/mt.

Then, the supply of coking coal seems to be stabilize that draw a price correction. However, a train derailment plunged market sentiment of possible coal disruption in near term.

 

DCE limits on intra-day trading to 6,000 lots. The flurry of futures trading activity can be traced to new regulation imposed by DCE on trading limit. The DCE announced on Friday, 18 Aug 2017 that the intra-day opening for a single contract is limited to 6,000 lots for Jan and May Iron Ore contract with longs and shorts both counted. The January contract is currently the most active iron ore future on the exchange. Each lot is 100 tonnes of ore.

The new ruling will be effective from 22 Aug 2017 night session onwards and trade participants classified under the “Hedging client” type will not be affected by the new ruling. The exchange also said on Friday that it will adjust the margins on coking coal and coke to 12% starting from 22 Aug 2017 onwards.

 

Demand improves for pellet and lump. Chinese buying interest for imported pellets remained strong due to ongoing stricter environmental restrictions imposed over steel mills. With the strong demand, pellet prices are likely to peak soon then the high prices will deter potential buyers from procurement.

The stricter environmental measures has also supported a firmer lump premium market as end-users start to stock up inventories in anticipations of tighter pollution controls that began in September 2017. In the meantime, it was heard that there were lump supply tightness among central regions of China.

 

Vale invests into pellet and launches second competitiveness drive. Brazil’s Vale plans to restart 7 million mt/year Sao Luis pelletizing plant in mid-2018 to meet market demand. In addition, the miner also planned to restart two smaller pelletizing plants at Tubarao with total capacity around 4 million mt/year but Vale did not set an specific timeline for when will the two plants restart their operations.

 

All three plants are idled for several years and once they are back online, Vale will boost a total pellets production capacity close to 60 million mt/year as compared to around 50 million mt nowadays. The restart of pellet plants is in line with Vale’s view on the growth of pellets which is expected to grow at an average 1% annually over the next ten year for blast furnace pellets and achieves 3-4% growth per year for direct-reduced pellets due to the higher demand from iron production capacity in Middle East and the US.

 

Moreover, the miner plans to cut its mining cost by USD4-5/mt over the next three years through greater automation.  According to Peter Poppinga, Vale’s executive director, the current cost of delivering iron ore to China is at USD33-34/mt for 62% Fe content material, including premiums and sustaining capex of USD3/mt. The cost on EBITDA basis is similar to other major Australian companies and the latest cost cutting will give Vale’s product an edge in price-competiveness.

 

Previously, Vale’s delivered cargoes to China was at USD65/mt then the miner underwent its first competitiveness drive in 2015-2016 to slash the cost down to USD35/mt through increased production and cost cutting.

 

Then, the company’s upcoming second competitiveness drive will then focus on higher production from the company’s S11D iron ore mine in Carajas, Brazil, via increased use of dry processing of iron ore, then further integration and synchronization of the company’s value chain with  investments in technology and innovation. With a reduced cost, Vale believed that its iron ore products will retain their popularity among the Chinese mills. As the China-based mills are moving on to bigger furnaces that needed the high grade iron ore with Fe 65-66% to keep up with higher productivity and capacity utilization.

 

Miners end strikes in coal mine, but potential supply disruption looms over derailment. Workers’ strikes were called off to make way for negotiation this week among the affected Australian coal mines. For instance, Glencore’s Hunter Valley mines have resumed operation after days of strikes. .  A trade source indicated that the supply disruption caused by the strike will not be felt sharply in the market immediately but rather later in the October or November period.

 

In the meantime, the coal supply from Queensland may be affected from a train derailment near Westwood at Rockhampton, Australia. The rail lines link the Blackwater system with Central Queensland’s mines from the coal-producing Bowen Basin to the Port of Gladstone for exports. The incident occurred on last Friday night, 18 Aug 2017, and no personnel was injured and cause of the derailment is still being investigated.

 

Since the derailment, the rail lines owned by Aurizon was reduced to operate on a single track on the Blackwater system, which caused some delays and cancellations of coal rail services. The railway company, Aurizon has issued a 12 hours closure on the Blackwater system as part of a scheduled maintenance. In the meantime, the company can rectify the recovery of derailed rolling stock and repair of rail infrastructure.

 

Meanwhile in China, end-users preferred to snap up cheaper domestic coking coals instead of the seaborne cargoes at the moment. Thus, there was a significant trucks queues in Shanxi waiting to buy up coals cargoes as prices have not risen yet. However, coals suppliers in Shanxi may raise its prices soon as supply gotten tighter in near term.

 

Verdict

The market is on bullish mode again, after much price correction in spot iron ore prices last week. Apparently, the demand of the spot iron ore prices have bowed over to the demand of steel which is expected to remain well supported in months ahead.

Stricter environmental measures are expected to stay among the Chinese policymakers through reduced steel output ahead of the winter months. Strangely enough, the main iron ore producers did not seem to produce much to deflate the boom at the moment. Thus, in short term expects the market to remain bullish till any changes in Chinese steel policy.