The spread in prices between different iron ore grades and segments in China, currently at the widest this year, may narrow as headline 62% Fe fines import prices fall toward a forecast $54/dry mt CFR China average in 2018, Australian investment bank Macquarie said Tuesday.
Dollar-based premiums and discounts around 62% Fe fines will "definitely drop" and percentage relative differentials should also soften as 62% Fe indexes fall, commodities analyst Serafino Capoferri said in a briefing at the bank's London office.
Differentials may narrow to a discount of around 15%-20% to the headline price for high silica lower iron content ores, among those of which are produced by FMG, Capoferri said.
The projection may allow producers of lower quality and high impurity ores to better weather a price fall.
Fortescue Metals Group, Australia's third-largest iron ore producer, discounted its flagship Super Special 56.7% Fe fines by 30% below IODEX to its contract customers for loadings in July, contract customers told S&P Global Platts.
For its 58.3%-Fe Fortescue Blend fines, the discount to IODEX was 23% for July-loading cargoes.
FMG was still able to produce at a margin under the bank's iron ore market pricing scenario, Capoferri said.
Further, FMG has options such as developing higher quality magnetite deposits and managing mine plans to produce from higher quality areas of its hematite deposits, according to Macquarie's mining and metals equity research team.
Long-term break even pricing for FMG may be around $40-45/dmt CFR China basis.
FMG and Vale's earlier proposed joint venture to blend their iron ore to capture higher overall pricing from mutual ore properties is unlikely to be reexamined for implementation, Macquarie said.
Brazilian miner Vale has been producing higher silica iron ore in its southern and southeastern Brazil operations. That comes after the Samarco pellet producer dam burst accident led to changes in mining processing from wet to dry, and new permitting.
For Vale, coping with this change alongside raising output of iron-rich feed in the north of Brazil is a new focus for its marketing and operations. This is reducing, in the longer term, the attractiveness of Vale working with FMG's products.
As iron ore import demand in China and higher steel rates penalized lower quality products, relative differentials for higher-grade ores saw support on demand to boost productivity in sintering and in pig iron output.
IODEX 62% Fe has been pricing in the low $60s/dmt CFR China in the past two weeks. Platts 65% Fe index trended at a 33%-35% premium to IODEX on a dry mt unit basis including gangue, and 58% Fe low alumina fines at around a 15% discount on the same basis.
Platts 58% Fe fines index is trending at 40%-45% Fe discounts to IODEX.
China, which imports the majority of iron ore consumed, is on track to import over 1 billion mt for a second year.
