Grange Resources
"turning a Tasmanian minnow into a market darling."China emissions cuts stoke record premiums for quality iron ore
Peter KerResources reporter
Apr 26, 2021 – 6.20pm
China’s drive to reduce steelmaking emissions has sparked record price premiums for high quality iron ore products which could be worth more than $3 billion for both BHP and Rio Tinto this year
while also turning a Tasmanian minnow into a market darling.Surging premiums for iron ore pellets and lump comes as iron ore futures surged again on Monday while a partner to the
dormant Australian Premium Iron (API) project expressed optimism that a smaller version of the project could soon be developed.
Premiums on niche iron ore products, like pellets, are surging. Vincent MundyPrices for ‘benchmark’ ore with 62 per cent iron were fetching $US186.25 per tonne over the weekend and a rally of more than 4 per cent in Singapore futures markets on Monday suggested
the record price of $US193 per tonne could be under threat this week.
Steelmakers have traditionally paid a premium to that ‘benchmark’ price for the higher iron content in pellets and the efficiency benefits – both cost and environmental – of lump iron ore.
S&P Global Platts said the premium paid for every “unit” of iron in a tonne of lump ore hit a new record in mid-April of $US0.6115 for each “unit”.
That equates to a premium of about $US37.90 on each tonne of lump ore sold by Australian miners like BHP and Rio, given the miners typically sell lump ore with iron grades of 62 per cent, or 62 “units” per tonne.
Based on the volumes of Western Australian lump exported by Rio and BHP last year, the current premium is worth more than $3 billion per year for both miners.
The lump premium is now 16 times higher than it was in August when the premium had almost disappeared entirely.
Lump ore can be added directly to a steelmaker’s blast furnace without the energy-intensive sintering process that is required before iron ore ‘fines’ products are added to a furnace.
Some Chinese provinces had placed limits on sintering, particularly during the northern winter, in a bid to reduce pollution.
“Steel mills in China have been reluctant to replace lump with sintering fines so far this year due to both emission control requirements and productivity considerations,” said analysts at S&P Global Platts.
While they are enjoying the record premiums, weak supply of lump ore from BHP and Rio over the past three months has exacerbated the price surge.
Rio’s output of lump in the three months to March 31 was close to 20 per cent lower than in the final three months of 2020, while BHP’s lump sales were weaker than in the previous five quarters.
“The tighter supply then further compounded the price impact of this demand pull,” said S&P Global Platts.
Both BHP and Rio expect to sell more lump iron ore from WA in future when production begins at their $US3.06 billion South Flank and $US2.6 billion Gudai-Darri mines respectively.
BHP expects South Flank to raise the ratio of lump within its WA exports to 35 per cent, and the mine should be in production within three months.
Rio expects 38 per cent of its Pilbara Blend output to be lump – up from 35 per cent – once Gudai-Darri begins production within 12 months.
About 28 per cent of Rio’s Australian total iron ore exports were lump in 2018, but that ratio fell to about 26 per cent in 2020.
S&P Global Platts said pellets with 65 per cent iron were receiving a premium of $US64.65 per tonne above the benchmark price; the highest levels since November 2017.
Tasmanian miner Grange Resources sells just over 2 million tonnes of pellets each year with approximately 65 per cent iron content, but recently told the ASX it was receiving a premium to the index price for such pellets.
That comment implies Grange is receiving more than $US250 per tonne ($321.78 per tonne) for its pellets at the moment; the company’s unit costs last year were $99.77 per tonne, excluding royalties and administration costs.Pellet prices have been stoked by supply disruption since BHP and Vale’s Samarco operation in Brazil was hit by a catastrophic dam failure in November 2015; while Samarco resumed production in December 2020, it is producing at much reduced rates.
Rio makes high grade iron ore pellets in Canada but output slumped 14 per cent in the first three months of 2021 on the back of multiple operational problems, including a fire.
New life for ‘unviable’ projectsHigh iron ore prices are breathing life into projects that were long considered marginal or unviable, including the sleeping giant of the Australian industry; the API project owned by China’s biggest steelmaker Baowu, Korean giant POSCO, US company AMCI and rail operator Aurizon.
Once touted as a sprawling $7.4 billion mine, rail and port project, the partners have been studying cheaper and smaller alternatives, including options to use the transport infrastructure of incumbent iron ore exporters.
Some of the West Pilbara iron ore deposits within the API project are partly owned by ASX listed minnow Red Hill Iron, which said on Monday that a smaller, revised development in the West Pilbara could be viable.
“During the quarter, new studies were commenced to examine the possibility of developing an iron ore project based on RHIOJV [West Pilbara tenements in the joint venture between API and Red Hill] resources alone and without blending ores from external sources,” said Red Hill in an ASX filing.
“This is providing positive leads and your board is confident that a viable way forward, based on a stand-alone project can be determined in the near term.”
The comments are a reference to the fact that API had originally planned to blend ore from the West Pilbara tenements with ore from higher grade API deposits more than a hundred kilometres further east.
Most iron ore industry participants believe API’s best chance of exporting iron ore is to abandon such costly blending plans and partner with Mineral Resources Limited, which also has iron ore deposits in the West Pilbara and wants to build a new port to service the West Pilbara near Onslow.
Red Hill told the ASX that discussions were underway into combining with “regional resources that may allow improved economies of scale”.
“The concept of proceeding on a stand-alone basis may be modified by the inclusion of other iron ore resources that are situated adjacent,” said Red Hill in the filing.
(20min delay)