Asia steel industry:Disruption on Hebei iron ore concentrate production

Hebei suspended explosives supply and iron ore dressing production

    In early October 2017, out of environmental protection purpose, localgovernment orally informed the majority of iron ore mines in Hebei province, tostop the supply of explosives to these iron ore mines and to suspendassociated iron ore dressing plants’ production (except the iron ore minesaffiliated to state-owned large steel mills). According to Mysteel, thesuspension will possibly last from now until March 2018. This should bepositive for high grade iron ore prices (pellets, lump, 62% fines and above) overheating season. Our Top high grade iron ore picks (BUYs) are RIO, BHP andVale.

    3-4% domestic iron ore concentrate effective supply will be impacted

    According to Mysteel, Hebei province’s raw ore and iron ore concentrateproduction represent c.40% and 25% of total national production volume,respectively. The explosives supply halt will potentially impact c.10.2mt of ironore concentrate production through October 2017till March 2018, implying14.3% of annualized overall iron ore concentrate production volume (71.5mt) inHebei province. As such, c.3-4% of national iron ore concentrate effectivesupply should be affected, and steel mills might need to externally procure rawmaterials to relieve the pressure. Nevertheless, actual duration of thesuspension remains to be seen. As we understand it, these actions are inaddition to the recent environmental inspections which may impact 100-150Mtof Run of Mine Chinese domestic iron ore production.

    Who are the beneficiaries?

    As China’s local steel mills face instabilities for iron ore concentrates supply,this might also impact the stability steel products’ supply; together with thewinter environmental control, steel mills out of Hebei/China will likely remainto be the beneficiaries. Regarding iron ore producers, this should benefit thehigh grade producers FXPO (100% pellets), RIO (61-62% Fe and 30% lump),BHP (61-62% Fe, 25% lump) and Vale (63-64% Fe). Note we recently lifted ourlump premium forecasts to US$15/t in 2018and long run to US$8/t, anddowngraded our lower grade 58% Fe realizations. See our recent report“Global Iron Ore Sector