China develops taste for high-grade iron ore as coastal furnaces fire up

BEIJING/SINGAPORE, Aug 20 (Reuters): China's demand for iron ore pellets and high-quality ore is expected to accelerate in 2020 as a result of Beijing's push to shift dozens of steel mills to coastal regions in its battle to stop smog blanketing industrial cities.

Relocating plants to the coast, with stricter environmental requirements, means up to 20 per cent of China's more-than-a-billion-tonne annual ore demand will shift from lower- to higher-grade ores within coming years, according to industry sources and a Reuters analysis of official import and production statistics.

Steel executives say the demand shift in the top ore market will mean declining purchases of low-grade supplies and greater demand for pelletised ore of a higher grade - with potentially major implications for ore exporters in Australia.

"Iron ore producers who can sell pellet-feed into China will be better placed than those who don't have such products," said Ian Roper, general manager at Shanghai Metals Market, a Chinese metals market research company, "with the major Australian (lower-grade) specialist suppliers facing the biggest challenge in the medium to longer term."

Brazil's Vale SA, the world's biggest iron ore miner, is also the top producer of pellets and pellet feed. LKAB in Sweden and Switzerland-based Ferrexpo are the second- and third-largest pellet producers.

Vale declined to comment for this article, but directed Reuters to its Aug. 1 quarterly earnings call, where it stated pellet production would be 45 million tonnes for 2019, down from 55 million tonnes in 2018 due to outages at some of its Brazilian operations. LKAB and Ferrexpo declined to comment.

Over a four-year campaign against pollution, as well as excess capacity in heavy industry, China has shut 700 small steel mills with 140 million tonnes of steel capacity deemed sub-standard, plus 150 million tonnes of inefficient capacity at larger firms.

Remaining mills will need to further cut emissions, and those located in the smog-prone eastern rust belt must move to designated steel parks along the coast, where fragile eco-systems mean environmental regulations are strict.