Really interesting article (2nd link). The Portside index has held up well despite the seaborne index taking a tumble over the last month and a bit. Seaborne contracts are declining by in large due to mills opting for lower inventories and purchasing smaller batches from port. Also, the blue chip product (PB fines) that dictates the seaborne price has seen its Portside inventory at a current 3 year low. This creates illiquidity in the market.
In fact, 58% Portside on Friday was the equivalent of the 62% seaborne price. 58% Portside closed at equivalent USD 89/dmt
(1st link)
Portside 62% is about USD 10 higher than the seaborne equivalent.
It is interesting to see if s higher % of transactions are weighted towards Portside as opposed to seaborne in the future. Volatility is to be expected in all markets but it is just going to a whole new level at the moment with the Dalian/seaborne pricing, which in turns is creating ridiculous daily spreads in the FMG share price.
The following extract from the fmg June quarterly will likely ensure fmg keep securing elevated prices for its products.
“Fortescue has recently established a new wholly owned sales entity in China to support our customers through direct supply from regional Chinese ports, providing customers with an option to purchase smaller volumes, in Renminbi
In any case, the fundamentals are as strong as ever for IO as I’ve mentioned quite a few times. This situation is not going to abate for quite a while yet.
http://static-metal.smm.cn/production/subscribe/email/siwac20190906181139.pdfhttps://do not advertise external s...or-iron-ore-are-at-record-highs-in-China.htmlFOCUS: Why port premiums for iron ore are at record highs in ChinaA tighter supply-demand balance for iron ore at Chinese ports coupled with sharp price decreases in the seaborne market have led to the steelmaking raw material being sold at large premiums at the docks in China.
Fastmarkets’ implied China port price for 62% Fe iron ore fines, fot Qingdao was $10.18 per tonne higher than its index for 62% Fe iron ore fines, cfr Qingdao on August 5. This is
the widest the gap has been since Fastmarkets launched its index for port stocks in March 2015.
In August, the port price was higher than the 62% Fe index for seaborne materials by an average of $6.75 per tonne.
This contrasts with the first seven months of this year, when the index for seaborne iron ore was the higher number - by an average of $1.55 per tonne.
Trading activity at ports in China - biggest consumer of the steelmaking raw material in the world - has boomed over the last 5-6 years, with stockpiles breaching the 100-million-tonne mark in 2014.
Relatively high stock levels at these ports had insulated steelmakers in China from bearing the full brunt of disruptions to Australian and Brazilian supply earlier this year. But a drop in these levels in recent months appear to have underpinned prices at the docks.
Seaborne plungeSeaborne prices are typically more volatile than port prices because the former are for cargoes scheduled to arrive in China over the next 1-2 months and are dictated by a smaller number of transactions. On the other hand, the latter are for materials sold on a cash-on-delivery basis at the ports and are based on a much bigger pool of deals.
The rapid decline of seaborne iron ore prices in August after peaking at a five-year high in July triggered its negative deviation in relation to port prices, in contrast with the significant positive deviation in May when seaborne prices jumped across the $100-per-tonne-cfr-China mark.
When Fastmarkets’ index for 62% Fe iron ore fines, cfr Qingdao dived from $115.68 per tonne on August 1 to $94.12 per tonne on August 8, many port traders were still selling iron ore based on the cost of their cargoes, which had been priced against the June or July average of indices when prices were around $110-120 per tonne cfr.
While a drop in seaborne prices would inevitably bring down port prices, the pace at which this happens could slow down as a result of sellers at the ports being unwilling to lower their offers massively, which could result in them incurring huge losses.
Lower stockpilesIron ore inventory levels at 45 major Chinese ports totaled 142.88 million tonnes at the start of this year, and went on to rise to a high of 148.43 million tonnes in early April, according to a local data provider. But these fell below 120 million tonnes in June, sliding to as low as 114.14 million tonnes in early July before returning to the 120-million-tonne mark at the end of August.
Meanwhile, the availability of the most-liquid product - Pilbara Blend fines - tightened in the last couple of months. Stockpiles of the brand at six major seaports north of the Yangtze River have remained below 5 million tonnes since late June. These fell to a three-year low of 2.7 million tonnes on September 2, data from another local data provider shows.
In contrast, these ports started off the year with about 6 million tonnes of Pilbara Blend fines, which went on to rise close to 9 million tonnes at the end of March before gradually falling to the current lows.
This tightness has kept port prices from falling as drastically as those in the seaborne market did.
Steady appetiteOn the demand side, the frequent restocking of raw materials by Chinese mills has also played a part in supporting port prices.
“Steel mills in China have been operating with low inventories, and while their profit margins had come under pressure, they have yet to voluntarily lower production. For any immediate needs, they turn to port cargoes,” a trader in Singapore said.
China’s pig iron output in the first seven months of 2019 totaled 473.44 million tonnes, up 6.7% on the year. A weekly survey by a local data provider also found that the blast furnace utilization rates of 247 major mills in China have largely remained above 80% since the start of August.
These illustrate how steady steelmaking rates - and in turn, iron ore demand - have been among Chinese mills.
Earlier this year, when port materials were generally cheaper than seaborne iron ore, it made sense for mills to keep buying at the docks.
But despite seaborne prices plunging last month - which made seaborne cargoes appear cheaper compared with port materials on any given day - mills and even traders are still hesitating about paying fixed prices for shipments that will only arrive a month or two later.
This is likely due to concern over prices not having bottomed out yet.
Supply-demand mismatchWhile seaborne iron ore supply had fallen short of demand in the first half of 2019, the situation appears to have been inverted since August.
Weekly iron ore shipments from a few major Australian and Brazilian ports have averaged more than 23 million tonnes since last month, compared with an average of just above 21 million tonnes in the January-July period, according to a Chinese data provider.
“Although the whole of 2019 could still turn out to be a year of undersupply for iron ore, the second half would surely witness supply increasing from the tightness in the first half,” a trader in Shanghai told Fastmarkets.
Buying interest for seaborne iron ore has been dampened by expectations of an increase in cargo arrivals and rising port stocks, coupled with uncertainties over demand for the steelmaking raw material in northern China - due to restrictions that will likely be imposed on industries including steel to lower emissions ahead of the country’s 70th National Day in early October.
Based on the current state of supply and demand, there are more reasons for port prices to remain firm than there are for seaborne prices, since the latter is typically a reflection of these fundamentals over the next couple of months.
Arbitrage opportunities?In theory, importing iron ore into China when seaborne prices are lower than port prices can be profitable. Increased buying activity for seaborne cargoes would also naturally close the price gap between prices in the two segments and the arbitrage window.
In reality, things are not that simple.
“For example, you are now able to buy Australian cargoes set to arrive in China in late September or in October at a fixed price that is several dollars below the seaborne equivalent of current port prices. But there is no way for you to cash in on the profit until the cargo arrives and you manage to sell at a higher price than you had paid, provided there are no further price drops,” a trader in eastern China explained.
“Some trading houses do buy such forward cargoes on a yuan basis, but the levels at which they offer to pay have priced in the backwardation market structure and are built around your seaborne cost,” he added.
Therefore, the apparent premium of port materials over seaborne cargoes since August has generated limited fixed-price seaborne transactions, maintaining the spread between the two.
Fastmarkets’ implied China port price for 62% Fe iron ore fines, fot Qingdao
was still $8.17 per tonne higher than its index for seaborne 62% Fe iron ore fines, cfr Qingdao on Thursday September 5.
(20min delay)