Source Platts.com London — 3 Aug 2009
The price of imported iron ore sold spot into China, rose 21.5% in July. Platts IODEX 62% Fe content price assessment for the steel making raw material increased by $17 in total to close the month at $96/dry mt CFR North China. The increase on a monthly average basis from June's $73.06 was 16.51% with July's monthly average hitting $85.12/dmt. This is down 51% year-on-year, however, as the monthly average for July 2008 was $173.23/dmt.
A number of drivers behind this month’s increase in the spot price were identified by sources and market participants with which Platts engages daily to produce the assessments and market commentary. The main driver being the shortage of supply.
Australian spot supplies started to dwindle in June, and appeared to vanish in July. Scheduling material to fulfill long term contract customers' requirements and a resumption of shipments to other Asian markets, were both cited as reasons for the absence of supply by the major Australia miners.
India remains China's main supplier of spot volumes, but material availability has been hampered by port congestion and seasonally bad weather.
On the demand side, the recovery of steel prices and production volumes in China has continued to fuel demand for steel making raw materials. Many domestic sources of iron ore concentrate closed in 2008 due to poor returns, resulting in a growing Chinese dependence on imported material to satisfy increasing demand.
July also saw the current annual benchmark contract negotiations go into overtime. Anglo-Australian miner Rio Tinto, the leading negotiator for the iron ore suppliers, settled 2009 annual iron ore contracts with Taiwanese steelmakers CSC and Dragon, Japan's Nippon Steel Corporation and Korea's Posco in June. The price agreed for the 2009 Pilbara Blend fines and Yandicoogina was $0.97/dry metric unit, a 33% year on year drop in the benchmark price for fines. The agreement equated to approximately $60/dmt FOB Western Australia. Factoring freight costs of $10-14/wmt, based on long term freight contacts, this gives a contract value of $70-74/dmt CFR North China. The average spot market value for 62% Fe fines in July was approximately 18% above this delivered benchmark price.
Large Chinese steel mills have not yet "officially" settled prices for long term contract material and continue to support the main negotiator China Iron and Steel Association (CISA) in holding out for a lower price. Clearly, however, as confirmed by Rio Tinto and Brazilian miner Vale, material is being shipped to these Chinese customers, who are paying a "provisional" price based on the settlement reached with East Asian customers. Australian iron ore supplier BHP Billiton stated this week that 23% of its iron ore sales for 2009 had been agreed at benchmark level, with a further 30% to be sold on a mix of quarterly negotiated pricing, spot pricing and index-based pricing. This leaves 47% or about 63 million mt still to be agreed. BHP would not deny or confirm if any 2009 iron ore contract agreements were with Chinese steel mills.
FREIGHT RATES SOFTENED AS CONGESTION EASED
In the freight market, Capesize vessel rates were very volatile in July.
Rates for cape vessels from Australia to North China dropped 35% in the first ten days of July from $18.40/wmt to $12/wmt, only to rebound up to $15.50/wmt before starting to slide down again to $14.25/wmt at the end of the month. Capesize vessel rates from Brazil to North China were also very volatile dropping 35% in the first fifteen days of July.
Back in June Capesize freight rates started to rise as congestion builtup at a number of Chinese ports. The congestion led to a number of vessels staying in China longer than anticipated and the result was a shortage in supply of available ships. Traders then started to look at Panamax vessels as an alternative to Capesizes, loading two Panamaxes (70-90,000mt) instead of one Cape (150-170,000mt). Freight rates then started to soften as congestion eased later in the month.
Freight market tightness seen in Australia and Brazil was not so problematic in India. Typically vessels from India are the smaller Panamax and Handysize (35-50,000mt) vessels, which did not experience the same congestion problems at discharge ports in China.
Consequently, freight rates from Haldia/Paradip and from Goa did not fluctuate as much as the Cape rates routes.
Although there was less volatility in Indian freight rates than from Australia, demurrage costs became a problem at a number of ports in the last two weeks of July. At the twin ports of Haldia/Paradip on the east coast of India, congestion rose to thirty days at its peak, with traders avoiding these ports whenever possible. Handymax freight rates to North China from these ports recovered $2.50/wmt in July, ending the month at $22.50/wmt, after having dipped to $17.50/wmt in the first week.
--Annalisa Jeffries, annalisa_jeffries@platts.com
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