The gap between higher and lower grade iron ore fines is narrowing despite the fall in ore prices that make the higher grades attractive to steelmakers.
Sources ascribe this to Chinese steelmakers opting for low grade ores to cut production costs amid plummeting demand.
The physical steel square billet price in Tangshan, a barometer of steel fundamentals in the key production hub, fell to the lowest in 10 years to Yuan 1,720/mt ($281.10/mt) on Tuesday and most steel mills are running at negative margins.
This is leading producers to cut steel output, sources said Tuesday.
The spread between the price of 62%-Fe iron ore and 58%-Fe low alumina iron ore has narrowed from $7.90/dmt in January to $5/dmt on Tuesday.
Fines with more than 63.5% iron content that contain less impurities usually see a rise in demand as it is cheaper to use the high grade ore for hot metal production and save on the cost of removing the impurities.
However, BHP Billiton's Yandi fines, the most liquid low grade fines with typical ferrous content of 57.3%, is seeing a rise in demand as Chinese end-users switch to cheaper raw materials.
"It would be more cost-effective to use high grade products now. However, the premise then is steel mills can maintain normal production. Amid free-falling steel prices, reducing production cost is more important," a procurement source based in northern China said.
Using low-grade fines also means producing less hot metal, which was in line with production cuts, he added. "When mills are undergoing maintenance, choosing low-Fe raw material would be reasonable," a source in Zhejiang added.
Steel mills wanted to keep the blast furnaces running at the moment and do not want to produce much finished steel products.
For mills still running at full capacity, the situation is different.
"We are using high-grade fines now as it contains higher Fe and can lower down overall production costs," a procurement source from a steel mill that is running at full capacity said.
In addition, for mills located inland, ore transportation costs are the same regardless of the grade.
"It would make more sense for inland China steel mills to use high-grade material," a procurement source based in central China said.
Source: Platts
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