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Premium prices being paid for Kumba’s quality iron-ore

24th July 2018

By: Martin Creamer

Creamer Media Editor

     

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JOHANNESBURG (miningweekly.com) – China’s flight to quality iron-ore is benefiting South Africa’s Kumba Iron Ore, which is receiving strong price premiums for high-grade ore.

Two-thirds of Kumba ore is lump ore compared with the third or less of its main competitors.

“We continue to witness better demand for high-grade ores, and we expect to benefit further from that in the second half of this year,” Kumba Iron Ore CE Themba Mkhwanazi said at the JSE-listed company’s presentation of results on Tuesday. (Also watch attached Creamer Media video).

Driving demand for high-grade ores is the push by China’s steel mills for greater productivity and Kumba is also continuing to grow its sales outside of China.

The share of Europe, Japan and Korea in the total exports of the Anglo American group company has risen by 3% to 43% in the first half of 2018.

High-grade premiums have soared in the six months, with Kumba standing to benefit still further going forward through its imminent introduction of a new super premium lump product with an average iron content of 66%.

Steel-mill margins are currently strong with profitability at near record level and mills consequently aiming to maximise production.

“This was a common theme that I noticed when we visited our customers in China earlier this year and this push for productivity drives demand for high-grade ores,” Mkhwanazi told Mining Weekly Online.

This is reflected in the differential between the Platts 65 and Platts 58 low alumina indices with the Platts 65 to 62 premium averaging $18/t in the first half of 2018 and currently trading at a record $28/t.

Kumba’s realised price averaged $69/t free-on-board as the Platt 62 index came down by $5/t and the freight costs rose by $2/t in the six months to June 30. However, this was partly offset by a $5/t higher lump premium.

The lump premium also staged an impressive recovery, increasing from 7.9c for every dry metric tonne unit (dmtu) - the internationally agreed-upon unit of measure for iron-ore pricing - at the start of the year, to 32c/dmtu, which takes the year-to-date average to an equivalent of $12/t.

Multiple sintering closures in China and strong demand for low alumina ores have been the key drivers of the recent rally in lump premium.

“So, there is a flight to quality in China and it’s here to stay,” Mkhwanazi said on Tuesday.

Supply side reforms have removed 250-million tonnes of steelmaking capacity in the last two years. As a result, steel capacity utilisation has risen by 15% to 77% in 2018.

China is targeting 80% utilisation by 2020, which suggests a continuation of a productivity push from the steel mills.

Capacity closures mean that the share of bigger blast furnaces has risen to 22% from 15% in 2013.

Bigger blast furnaces use a higher proportion of lump, pellets and high-grade ores.

Over the long term the Chinese industry will progress towards the developed world standards of Japan and Germany where all blast furnaces are above 2000 in volume, which supports high grade premiums and lump prices.

Emission controls will become tighter in China. As part of Beijing’s 2030 masterplan, the government is targeting a further 38% reduction in air pollution, which implies an increased preference for high grade ores.

The share of top-ten steelmakers in China is set to virtually double to 60%. This is supportive of steel pricing and real margins in China and therefore likely to bolster demand for high-grade ores.

This is enough evidence that the notion of the flight to quality is here to stay.

In response, Kumba is upgrading its product portfolio. In the first half of 2018, Kumba’s average iron content rose to 64.5%, up by nearly 0.4% from a  year ago, which helps the company achieve higher prices.

Kumba is considering the introduction of a new super premium lump product with an average iron content of 66% in the near future, increasing the average iron content of the overall product portfolio.

Kumba has also increased the ratio of lump ore to fine ore from 66% lump a year ago to 68% in the first half of 2018.

This allows Kumba to take advantage of the relatively strong lump premium currently being paid.

Kumba put in a solid operating performance across the value chain and continued to deliver shareholder returns.

However, rail problems resulted in lost opportunities to achieve higher export sales volumes, restricting revenue to R19.5-billion and resulting in 24% earnings fall to R7-billion compared with the first six months of last year.

Attributable free cash flow of R2.8-billion and a strong opening cash position translated into an interim cash dividend of R4.7-billion, despite the impact of a stronger rand and softer iron-ore prices.

Net cash of the company is down from R13.9-billion on a cash dividend payment of R6.3-billion and capital expenditure of R1.4-billion on deferred stripping and expansion, including at the Dingleton residential township.

In the six months to June 30, Kumba reported a 14% gain from higher sales premiums and cost savings, which helped to offset the impact of a 7%-stronger rand, 3% lower export prices and higher inflation-related costs.

A net freight loss on shipping operations cut the earnings margin to 36% from 43% last year.

While controllable costs were held at $1/t, non-controllable costs rose $5/t on an average cash break-even iron-ore price of $46/t, which was up by $6/t on last year.

The lower earnings before interest, taxes, depreciation and amortisation resulted in operational cash flow generated from operations decreasing to R6.9-billion from R11.7-billion for the same period last year.

Shareholder returns are being prioritised through a new dividend payout policy of 50% to 75% of headline earnings while growth investment continues.

The company described the rail performance of the State-owned Transnet as being “sub-optimal”, with six derailments since the second half of 2017.

As a result, iron-ore railed to the Port of Saldanha remained similar to the comparative period at 20.8-million tonnes. The derailed wagons have been replaced and performance is being monitored closely to secure delivery of contractual capacity. Initiatives have been implemented to mitigate the impact of derailments, which include reducing loading times and improving our turnaround times at the mines, Kumba said in a release to Creamer Media’s Mining Weekly Online.

Edited by Creamer Media Reporter

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