China steel mills pare iron ore stocks amid low profits

Several Chinese steel mills have pared their iron ore stocks amid low profit margins, with not much concern yet on supply shortfalls in the wake of Brazilian mining firm Vale's output restrictions.

Most mills surveyed by Argus have no plans to rush to shore up stocks, despite forecasts of Vale's iron ore supplies falling by 50mn-70mn t/yr on mining restrictions after a 25 January tailings dam breach at its Feijao mine in Brazil.

Seaborne prices have been well supported at over $85/dry metric tonne (dmt) after the lunar new year holiday, although seaborne transaction volumes have remained limited.

"Our total inventory is lower than what it was last year but we have no purchase plans for the next two weeks," said the manager of a Henan-based mill.

Sellers have been reluctant to reduce offer prices, expecting prices to rise as steel demand picks up from March. "Next week more mills have to restock because many of them have inventory only until end of February, while portside stocks of popular low-grade ores such as SSF fines and Fortescue blended fines have been depleted quite a lot," said a Beijing-based trader.

A key reason for steel mills' reluctance to stock up on iron ore stems from low profit margins that have stagnated since steel prices crashed in November.

A Shandong-based mill with seven days of inventories said it is looking to stock up on cheaper, non-mainstream ores like Indian fines to save on costs.

A Hebei-based mill with 15-20 days of stocks said it had bought too much cargoes before the lunar new year holidays. It is now planning to reduce the premium medium- and high-grade ore stocks and buy more low-grade ore.

Traders have been reporting offers of mainstream ores from steel mills since the markets reopened after the lunar new year holiday. A Shanghai-based trader received an offer from a steel mill yesterday of March-loading PB fines at a $2.40/dmt premium to the March 62pc index.

"Mills are not in a hurry to stock up and looking to maintain low stock levels due to shrinking profits. It is hard to see large-scale procurement will emerge from mills in the near term unless the steel markets improve," said a Beijing-based iron ore trader associated with a steel mill.

A Shandong-based mill has put a part of its stock of long-term contracted iron ore cargoes up for sale but has not been able to make a sale on the back of weak demand.

Large steel mills in Shandong have pared their iron ore use after the lunar new year holidays. While mills held average stocks of 34 days of iron ore use before the holidays, current stocks will be closer to 30 days, said the manager of a Rizhao-based mill. The mill has reduced its stocks of high- and medium-grade ores and increased the proportion of low grade ores to around 10pc of total stocks.

A Jiangsu-based steel mill has pared its stocks to 27-28 days at present from around 35-36 days of stocks before the holiday. "Large mills still have mostly high- and medium-grade ores as inventories, while smaller mills are now operating with around 50pc of low-grade ores in their stocks. But large mills are now keen on buying more low-grade lump and fines," said a manager of the mill.

A Nanjing-based mill has drastically reduced its stocks to 30 days from 40 days of use before the lunar new year holiday.

A Hebei-based mill said stocks will be around 10 days of use in the next quarter starting April from the current level of 14 days. The mill is looking to increase the use of scrap in the converter burden to save costs.