[ferro-alloys.com]As seaborne iron ore fines prices surged to a six-year high, lump premium is on the verge of breaking below the zero mark, with market sources discussing the possibility of a discount for seaborne lump cargoes to fines pricing due to inferior reselling opportunities both at Chinese quayside and in the seaborne market.

On Aug. 12, Platts spot iron ore lump assessment, a premium over a corresponding forward strip of 62% iron ore fines, closed at a three-year-low of 3.8 cents/dmtu CFR China, a fall of 28 cents from 32.15 cents/dmtu CFR China early-March and just 2.25 cents shy from the historic low of 1.55 cents seen in April 2017.

Iron ore lump is premium product over fines as it could be charged directly into blast furnaces, saving sintering costs and reducing pollution. However, market sources observed lower valuations for lump ores compared to medium grade fines at Chinese ports.

"Newman blend lump was trading around Yuan 915/wmt at Caofeidian port, while the price of Newman fines is around Yuan 936/wmt [on Aug.17]," a Chinese trader source said.

On Aug.18, 61.77% Fe and 9.8% moisture Pilbara Blend fines traded at Yuan 922.5/wmt at Jingtang port, while 62.1% Fe and 4.87% moisture Pilbara Blend lump traded at Yuan 923/wmt on COREX Ore Supermarket.

Taking into account of the Fe and moisture differences, and adjusting for port charges, 13% VAT and the exchange rate on Aug.18, the trades indicated a discount of $0.1162/dmtu for lump on import parity basis.

Several trader sources raised the possibility of grinding lump ores into fines to reduce lump stockpiles and achieve a higher resell price, sources said.

"The finished products for grinding PB lump has similar specifications as the original lump product, but it is in a fines form. So theoretically it could achieve higher prices then both PBF and PBL," a trader source in Hebei said.

An end-use source in Shanxi province said they ground a small amount of PBL into fines due to a preference for sintered ore.

"We have the grinding facility at mill site and the cost is only around Yuan 6-7/wmt, but we have yet to try reselling the crushed product," the source said.

However, other sources said that grinding would unlikely become prevalent due to limited availability of crushing facilities and a projected increase of procurement needs for lump in the winter.

Meanwhile in the seaborne market, combination cargoes of PBF and PB lump was also having a hard time finding buyers while standalone PBF cargoes was receiving heated interest, sources said.

The traded premium for PBF cargoes were heard at around $4.1-$4.4/dmt on the September average of IODEX CFR China for arrival in September, while the tradable premium heard for PBF cargo was below $3/dmt over September IODEX when co-loaded with PBL priced at flat to September IODEX + LP 62.5% CFR China.

"People are essentially discounting a combination cargo due to the unwillingness to take lump," a Chinese trader said.

Oversupply of direct feed

While a technical explanation of grinding a direct feed into a crude material may seem counter-intuitive, the supply and demand fundamentals could provide some clarification of the phenomenon.

On the supply side, inventory levels for lump at 45 Chinese ports reached 25.7 million mt on Aug.14, up 7 million mt from the beginning of the year and up 5.3 million mt from the highest level in 2020 around early September, according to market sources.

There was also the diversion of lump cargoes meant for Japan and Korea due to COVID-19 related steel demand shock, adding to the overall supply into China.

On the demand side, slacker environmental control in China this year has been limiting the upside to direct feed usage while both imported and domestic pellets were seen as cost-efficient alternatives to lump.

"Chinese mills generally prefer sintered ore and it calls for a temporary shutdown of blast furnaces to adjust up the usage rate of lump and pellet," an end-user source in Hebei said, "but there is no strong incentive to have such a disruption in production."

Amid a sustained supply shortage of medium grade fines and a supply surplus of direct feed options, bearish sentiments loom in the near-term on the valuation of lump relative to that of medium-grade fines. Meanwhile in the longer-term, stricter sintering control in Northern China during the winter season is expected to provide a notable lift to lump demand.

(S&P Global Platts)

• [Editor:王可]