[ferro-alloys.com]Steel mills in northern China have defied expectations of strong iron ore restocking activity after the Lunar New Year amid continuing weak steel margins and high raw material costs, market sources said Monday.

Traded levels for Australian Pilbara Blend fines, the most heavily imported iron ore brand in China, surged above Yuan 600 /wmt at end January from around Yuan 560/wmt in mid-January on speculative activity and a strong paper market amid concerns of disrupted supply from Brazil after a dam collapse.

Although prices at the northern ports have since eased from a peak of Yuan 684/wmt on February 11, they remain well above Yuan 600/wmt, adding to strong cost pressure on mills that were already grappling with slim steel margins.

"End-users are looking to keep production levels low as Pilbara Blend fines offers are still at very high levels," a source at a mill in northern China said Monday.

"PBF prices have fallen to Yuan 630/wmt, but there is no incentive to buy given current steel margins," the source said, adding: "Steel margins are around Yuan 100-200/mt for the smaller and more profitable mills. This is similar to past months -- but that was when PBF was trading well under Yuan 600/wmt."

Traders have been reluctant over the past week to lower offers for PBF due to prevailing high prices for March-loading seaborne iron ore cargoes.

"There were traders with cargoes due to arrive at the ports in time for the expected post-Lunar New Year restocking activity. Given the relatively high prices they paid, there is a general reluctance to lower offers to offload cargoes," one trader said.

Market sources expect the current tepid level of demand at the ports to continue, with little change expected to underlying demand drivers.

"There is still a lack of clarity on steel margins and end-users are looking for April-loading cargoes," a trader in China said. "Steel margins are expected to pick up towards the end of March and port buying levels should be in line with those expectations," the trader added.

A second trader said: "Inventories for mills in the Tangshan region are at very low levels, but they have showed little interest in large-scale restocking over the past week and that should continue unless there is a large drop in prices. Northern mills are fine with holding about five days worth of inventories and are planning to only procure in limited quantities. In fact, mills closer to the ports are able to hold only about three days worth of inventories."

Australian miner Fortescue Metals Group's narrowing of discounts for March-loading PBF cargoes to Platts benchmark 62% iron ore index is expected to weaken the current buying preference for low grade iron ore.

"There has been strong demand for FMG's Super Special fines over the past month due to its low cost in keeping blast furnace operations going. However with the current sharp narrowing of price spreads with medium grade fines, there is less incentive to keep up a relatively high utilization rate for SSF," a Chinese mill source said. "With higher coke prices, the thermal rate for utilization of lower grade fines has made using certain discounted medium grade fines more economically feasible," the source added.

"Demand for Jimblebar fines [JBF] is expected to strengthen given the current situation. With mills keeping steel production levels low, the high phosphorus level of JBF is tolerable in small volumes and its sharp discount for a product with 61% Fe makes it very attractive," an international trader said.

Traders are also currently looking at supplying low grade Indian fines, which are priced at large discounts to FMG low grade cargoes, a Tangshan-based source aid.

High grade fines continued to face illiquidity at ports amid the current cost pressures on end-users. Market sources said inquiries and bids for high grade fines were limited, with cost-cutting for raw materials a top priority for end-users.

"There is some demand for Carajas fines, but this is largely limited to mills with large blast furnaces and on a need-to basis," a seller source said.

(S&P Global Platts)

• [Editor:王可]