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INDEX ANALYSIS: Port stocks premium narrows against seaborne

Historically the difference in price between portside and seaborne iron ore products has been minimal, generally averaging around 5-10 y/wmt, moving either higher or lower than the other. In Q3 2019 this difference increased significantly to an average of 34 y/wmt, with a high of 73 y/wmt on the 7th August 2019. Supply side disruptions and a resulting reduction in stocks across ports in China contributed to the widening gap in prices. Traders at ports held on to products with high demand, hoping for higher returns. When the iron ore price tumbled, the seaborne market fell harder than at ports.


*Seaborne $/dmt prices converted to an equivalent y/wmt basis using the following formula:

Seadex (Yuan) = Seadex ($)*(1+ VAT)*(1-moisture)*exchange rate + port charge

 

The first half of 2019 saw the seaborne price of Pilbara Blend Fines (PBF) shift against the price of PBF port stocks, from a premium to a discount and back again. The difference was typically narrow, averaging 10 y/wmt either way. This trend was broadly consistent across all major brands but is demonstrated in the chart above with PBF. Port stocks were high at this time, peaking at 148 million tonnes (Mt) in April 2019.


Supply disruptions globally resulted in reduced iron ore imports to China and therefore a reduction in port stocks from April 2019. The impact was not just on volume, but also on the product type, with some mainstream products seeing a drop in quality, whilst others were replaced in part with alternative products that are lower in iron content. This caused a rally in iron ore prices at ports and on the seaborne market. Traders at port held on to the mainstream products that were in short supply, expecting the price to increase further, which compounded the demand and therefore, prices of some products such as PBF.

Seaborne and portside prices generally rallied in line with one another from May through to July 2019. It was as the iron ore prices started to tumble that the two diverged, with portside PBF maintaining an average of 50 Yuan (approx. USD $7) more expensive than seaborne PBF in August. The Mysteel SEADEX PBF brand assessment dropped from a high of $123.95 on the 2 July 2019 to $89.30/dmt within two months, a reduction of 28%. At the same time the PORTDEX PBF brand assessment at Qingdao fell from 906 y/wmt to 722 y/wmt, a smaller percentage change of 20%. As the price reduced, mills were less inclined to buy seaborne cargoes, preferring rather to restock only as required from ports. This contributed to port prices remaining at a premium to seaborne.
 

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Port stocks have slowly started to rebuild as supply from major miners returns to normal. In the month of October, the average difference in price of PBF at ports compared to seaborne has also reduced slightly to around 32 y/wmt. The difference continues to converge in November, however, simultaneously the outright prices for seaborne and portside continue to decline. So far November has proven to be a lacklustre month for iron ore with activity across both markets relatively muted. Some market participants expect demand to increase in December as mills begin to restock in preparation for the Chinese New Year. If port stocks return to previous levels, this could also help to rebalance the current price difference across the two markets.

Written by: Mysteel Iron Ore Index Team, MIODEX@mysteel.com