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Top miners deepen iron ore discounts to China as supply grows
June 23, 2014 / 7:16 AM / in 3 years

Top miners deepen iron ore discounts to China as supply grows

SHANGHAI/SINGAPORE, June 23 (Reuters) - Global miners Rio Tinto and Fortescue Metals Group are making deeper cuts in prices of low-grade iron ore cargoes to China, as competition heats up in the world’s top buyer amid rising supply.

The move underscores the iron ore market’s move into surplus as big producers, such as Rio and BHP Billiton, ramp up output, overwhelming demand growth in China. The reductions will eat into profits that have already been eroded by weaker prices.

Iron ore has fallen by almost a third in 2014 after years of lofty prices that swelled earnings for mining giants, while Chinese steel mills have wound back long-term supply contracts in favour of cheaper spot cargoes.

“Since many Chinese steelmakers have cut and cancelled annual contracts with miners, that has prompted miners to lower prices to keep their customers,” said an official with a steel mill in northern China who had confirmed discounts with Australia’s Fortescue.

Rio Tinto, the world’s No. 2 iron ore miner, is offering clients with annual contracts a discount of 17 cents per dry metric tonne unit for its Australian Robe River 56.9-percent grade fines, a granular form of iron ore, said a steel mill official who has spoken to Rio.

This equates to a discount of about 13 percent, if based on this month’s Platt’s 62 percent iron ore index, compared with a discount of 6 percent from November 2013 to June 2014, sources with direct knowledge of the matter said.

“To be very honest, I don’t think this grade can be sold without a massive discount because we’ve got so many cargoes of similar grade being sold at very low prices in China,” said a trader in Shanghai.

Fortescue, the world’s No. 4 producer, has offered a 14 percent discount for July cargoes of its 56.7 percent super special fines and 8 percent for its 58.3 percent grade blend fines, compared with 12 percent and 6 percent in June.

The discounts have been widened to 15 percent and 9 percent for some customers, according to two Chinese steel mill officials with direct knowledge of the matter, with flexible terms on offer to entice customers to act quickly.

Lower quality ore is feeling the pinch amid rising ore supplies. At the same time Chinese steel mills are under pressure to cut emissions, reducing demand for lower quality ore that requires greater processing.

Officials for Fortescue and Rio Tinto declined to comment.

China imports about two-thirds of global seaborne ore, which last year totalled 1.2 billion tonnes. In the first five months of 2014, its purchases rose 19 percent to 382.7 million tonnes, with more than half coming from Australia.

“The seaborne iron ore market is moving from a pricing structure influenced by high-cost Chinese production to one dominated by market saturation,” Morgan Stanley said in a recent report.

Benchmark 62-percent grade iron ore .IO62-CNI=SI hit a 21-month low of $89 a tonne on June 16, but edged back to $92.10 on Friday. Morgan Stanley sees the benchmark price averaging $95 per tonne in the second half of the year.

However, UBS analyst Glyn Lawcock says prices may recover as the recent price drop was exacerbated by extra supply of low grade ore from Fortescue. Its ore quality should improve as it starts reaching higher grade ore at its new Kings Valley mine.

“We’re relatively close to the bottom now in iron ore,” said Lawcock, adding he also sees a pick-up in Chinese demand in September-October as mills restock ahead of winter. (Additional reporting by Sonali Paul in Melbourne; Editing by Richard Pullin)

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