For all the talk by Australian investors, fund managers and analysts about how BHP, Rio Tinto and Fortescue are doing well in the current iron ore price boom, the clear winner is the recovering Brazilian giant Vale.
Huge gains in ore prices in the past year have seen a more than doubling in the market prices of 62% 58% and 65% fines, according to figures from Fastmarkets MB.
But the rise has been more apparent this year and seen demand jump sharply for 65% Fe fines from Brazil at a time when a shortage (because of lower production) of supply has hit the market.
That has had a positive demand on prices for iron ore and the shares of the big four miners.
The year-to-date stockmarket performance of the shares of the four giant miners and exporters tell the story.
BHP shares are up 12.3% year to date, Rio shares are up 5.9%, Fortescue shares have fallen 9%, but shares in Vale are up more than 21%.
That rise is despite the slide in Vale’s March quarter production and sales from December (most analysts ignored the fact that the proper comparison – with the March quarter of 2020, showed a 14% plus rise in sales).
Again most Australian analysts ignore the reason for this outperformance – the surging price (and demand) for Vale’s basic 65% fines product – the highest quality ore shipped globally and especially into China.
The daily pricing indexes explain the story – while the price of 62% Fe fines produced by the likes of BHP and Rio Tinto is close to all-time highs, the price of 65% Fe fines from Vale mostly is at all-time highs and has been for more than a week.
Now some commentators in China believe there’s a good chance the price of 65% Fe fines could reach $US230 a tonne in the near future.
There’s a shortage – Brazil can’t produce enough of the product to meet rising demand from Chinese mills which want the higher quality ore to reduce pollution (it requires less sintering before being used in blast furnaces) and the yield is higher than using 62% Fe fines or the 58% product.
Brazilian analysts expect Vale’s production to pick up this month (as it did in March when Brazilian iron ore exports surged 32.6% from low February)
While there’s tens of millions of tonnes of 62% and 58% (and 62% Fe low silica and a couple of other one-off grades) in Chinese stockyards at ports and steel mills, there’s less than one million tonnes of the 65% of the Carajas (Brazil) fines at Chinese ports.
This shortage, plus hefty profit margins for most Chinese mills and the continuing crack down on pollution and capacity means the mills want as much of the 65% product as possible. They are currently being forced to blend it with the 62% product from Australia to maintain blast furnace campaigns and maximise the yield of crude steel from each tonne.
The high profit margins mean the mills can afford to offer more for the 65% product from Brazil.
That has seen (as we have previously pointed out) an expansion in the premium for 65% over 62% and 58% product from Australia and other countries.
On Wednesday the price of 65% Fe Brazil fines was a record $US221.90 a tonne, up 12.6% from $US197.10 a tonne at the start of April.
That saw the price margin over 62% Fe fines hit a record $US33.67 a tonne on Wednesday, up from $US29.50 a tonne on April 1.
The premium over 58% Fe fines on Wednesday was also a record – a massive $US60 a tonne.
In the past year the price of all three iron ore types has more than doubled.
The price of 62% Fe fines is up from $US85.04 a tonne on April 22, 2020 – it was $US183.62 a tonne on Thursday of this week (a fall of $US4.61 a tonne from Wednesday’s near record high).
The price of 58% Fe fines was $US74.20 a tonne on April 22, 2020 – on Thursday of this week it was $US159.38, down $US1.85 a tonne.
And the price of 65% Fe fines was up from $US100.40 a tonne a year ago to $US218.70 a tonne (down $US3.20 a tonne).
The movements tell the story – 62% Fines rose $US98.58 a tonne in the 12 months – a rise of 116%. The price of 58% Fines jumped $US85.18 a tonne (according to Fastmarkets MB data) in the year, a rise of 115% and the price of 65% Fines was up $US118.30 a tonne or 118%.
That small difference in the size of the increases in percentage terms has emerged in 2021. The price of 62% Fe fines is up $US23 a tonne from the end of 2020, the price of 58% fines is up by just $US10 a tonne and the price of the 65% Fe fines product has gained $US44 a tonne.
These huge price rises tell us a couple of other things – first up is the low production costs of the Chinese mills (understandable when annual output is a billion tonnes a year) and the high profit margins which, if anything, have risen in recent weeks because there is a growing belief that if the crackdown on pollution and unused capacity actually happens, there could be a shortage of key products like rebar and hot and cold rolled coil steels.
But once the pollution/unused capacity kerfuffle has settled, you can bet that the mills will turn to lower grades – the 62% product especially – to keep margins as high as possible.
