[ferro-alloys.com]Seaborne iron ore prices remained largely supported in the first quarter as a seasonal tightening in supply buffered the demand destruction in China wrought by the coronavirus outbreak, but has entered unchartered territory in Q2 as demand picks up in China while cargoes destined for Europe hunt for new homes.

The escalation of the coronavirus outbreak in China in the lead-up to Lunar New Year led to iron ore prices falling to $84.95/dmt CFR China on January 28, dipping below the $90/dmt mark for the first time since early December.

However, despite steel sales and construction activity grinding to almost a complete halt amid a nationwide lockdown in February, iron ore prices demonstrated resilience, hovering around $80-low $90s/dmt, as blast furnaces continued to operate due to the technical difficulty of a partial or complete stoppage.

Although procurement activity was dialed down to a need-to basis in the month, disruptions in iron ore supply from Australia and Brazil supported speculative buying as port inventory levels started to dip.

Cyclone Damien in Western Australia in early February lowered Rio Tinto's 2020 shipment guidance to 324 million-334 million mt from 330 million-343 million mt, with traded premiums for Pilbara Blend fines or PBF rising above $2/dmt over the arrival month average of IODEX since February.

Price volatility due to the coronavirus outbreak and supply issues saw market participants preferring to secure cargoes on a floating over fixed price basis. Platts observed 53 spot PBF trades from both Rio Tinto sales and secondary market trades in Q1, of which only 17% were fixed price trades.

Weak shipment volumes from Brazil amid monsoon season in Q1 spurred strong demand for Brazilian Blend fines or BRBF, with 64% of the observed 14 deals done on a fixed price basis.

The impact of the coronavirus outbreak on downstream sales placed heavy pressure on end-user margins, with most blast furnaces being kept in operation, leading to an increased emphasis on managing production costs.

Platts observed increased end-user demand for discounted medium grade fines to partly replace mainstream Australian sinter feed. This would enable end-users to obtain similar blast furnace performance levels up to a point, with cost savings on the level of contaminants or less ideal sintering qualities.

Platts observed a lowering of traded discount levels for MAC fines or MACF from minus $2.60/dmt over the arrival month 62% index at the start of the year to around minus $1.60-minus$1.70/dmt by end March. For Jimblebar fines or JBF, a more pronounced decrease in traded discount levels from minus $9.55/dmt over the arrival month 62% index in early January to mid-$6s/dmt at end March. Platts also observed forward trades for MACF and JBF in February and March at premiums to BHP's monthly discount levels.

The increased usage of low grade fines procured at ports was reflected in FMG's narrowing of monthly discounts for low-grade products. Traded levels for BHP's Yandi fines saw a steep reduction in discountS over the quarter from around minus $6.50/dmt over the arrival month IODEX on January 3 to minus $2.90/dmt by end March.

End-user demand for Yandi fines improved as it can be a cost-effective replacement for higher grade PBF and for the allowance it can provide in the overall alumina level in the blast furnace feedstock, allowing for less usage of expensive Brazilian low alumina fines. Although discount levels inched towards the minus mid-$2/dmt level, an increase in supply due to lower production levels in Japan capped price upside.

The inverse was not the case for high-grade iron ore, with reduced Brazilian shipments due to an unusually heavy monsoon season leading to supported traded price levels for Carajas fines or IOCJ. Delays in China's domestic concentrate production due to travel restrictions affecting migrant workers also led to observed supported premiums for imported concentrates and lump due to the country's largely inflexible need for direct charge feedstock.

The second quarter looks to be unchartered territory for iron ore dynamics as China's iron ore demand rises in tandem with the resumption of construction activity. With steel margins improving and port inventory levels falling, some market participants expect speculative buying activity to increase.

On the supply side, reduced production levels in Japan, South Korea and Taiwan in Q1 has led to reselling and the diversion of cargoes to China. With steel production levels in Europe plunging as steelmakers look to drastically cut capacity, there are expectations of further reselling of high-grade iron ore cargoes to China in Q2 on a larger scale. While the different chemical composition of certain products compared with current Chinese procurement options may limit the reselling, estimates of the influx are still expected to heavily pressure premiums for high-grade cargoes.

The ongoing coronavirus pandemic continues to overshadow current iron ore supply estimates. Although its impact on mining operations has been limited to mainly niche products from Chile, Peru, Canada and South Africa, there are concerns over the impact on Brazilian production due to Vale potentially postponing its resumption of lost production capacity.

Given the reliance on Brazilian fines in many end-users' sinter feeds in China and reduced shipment volumes in Q1, any reduction in production would cast a spotlight on low alumina demand and test the flexibility of end-users in adjusting the alumina levels in their sinter feeds.

(S&P Global Platts)

• [Editor:王可]