For miners seeking to cater to the changing appetite of China, the world's biggest iron ore importer, all eyes are on Tangshan, the country's biggest steel-making city and the drastic measures it's taking to rein in pollution.
It recently told mills in the city that production cuts, initially set at 10 to 15 per cent and in place from May to November, need to go further with some companies facing curbs of up to 50 per cent during the summer.
Tangshan has also warned mills they could face closure if they don't meet emission targets by October.
The steps are at the forefront of a crackdown by Beijing, which recently flagged a widening of anti-smog targets to 82 cities from 28 now.
The impact on pricing for iron ore has been dramatic and miners are scrambling to revamp their strategies in response.
For lower-grade ore, where the iron content is below 60 per cent, discounts to higher-grade material have widened significantly.
In contrast, premiums for high-grade pellets, which can be shovelled straight into a steel furnace and do not go through a highly pollutive process called sintering, have surged.
"The era for China to buy cheap low-grade ore in order to be cost effective has passed,” Zhang Kun, a Beijing-based iron ore trader at Concord Fortune, said.
“What China needs now and in the future will be more sophisticated ore, with higher iron and lower impurity content."
The slew of industry initiatives includes a makeover for Rio Tinto's flagship iron ore product, sources with knowledge of the matter told Reuters.
Its Pilbara Blend fines, the benchmark for fines, will have less alumina and will be less pollutive after part of the blend was removed and launched as a separate medium-ore grade called RTX last week, they said.
"The main purpose of this move is to maintain the competitiveness of our mainstream product, PB fines, in the Chinese market after seeing smaller premiums in the past quarter," said a company source, who was not authorised to speak to the media and did not want to be identified.
Rio Tinto declined to comment on its product line-up.
Of the big four iron ore miners, Brazil's Vale stands to benefit the most from the market shift, particularly from the jump in Chinese demand for pellets – one of the few options for mills when output curbs kick in on heavy smog days.
"Our inventory for sintered ore is running low due to frequent production curbs,” said a manager at a domestic steel mill in Tangshan, declining to be identified, as he was not authorised to speak to media.
“I am willing to pay whatever it costs to replenish and add stocks for pellets."
The benchmark price for 65 per cent iron content pellets has shot up by a fifth over the past year, according to Metal Bulletin, while the premium on pellets over 62 per cent fines surged to $US56.84 a tonne on July 6, not far off a record $US65.40/t reached last October.
Vale produces nearly a third of the world's pellets for export and has restarted some ‘idled’ pelletising plants to account for a drop-off in output after a 2015 dam disaster closed its Samarco venture in Brazil with BHP.
And it has a leg up on rivals with high-grade fines due to its massive S11D iron ore mine in Vale's rich-grade Carajas resources complex that started shipping out ore last year.
China's use of pellets is around 12 to 13 per cent of its iron ore consumption, low compared with Europe where it is 33 per cent, according to consultancy CRU International, adding that imports account for just 13 per cent.
China's annual pellet consumption was expected to increase 14 per cent over the next five years to around 160 million tonnes as Brazil boosted pellet production and more pellet became available elsewhere, Erik Hedborg, senior analyst for iron ore at CRU, said.
By contrast, of the other three, only Rio currently has a presence in pellets although that is not in Australia from which it ships most of its iron ore.
Instead the name of the game is improving the quality of fines, with BHP and Fortescue Metals Group recently announcing new mine investments.
BHP said last month it would spend $2.9 billion on its South Flank iron ore project, aiming to raise the average grade of its its Western Australian iron ore to 62 per cent from 61 per cent.
And in May, Fortescue signed off on a $1.28 billion mine and rail project, also in WA that is expected to yield ore closer to 62 per cent.
Fortescue is under pressure due to the discount for lower-grade ore. Prices for 58 per cent ore, a similar level to Fortescue's product, have been trading at a discount of about 40 per cent to the 62 per cent benchmark since the start of the year.
Profits for Fortescue have been hit hard, with earnings before interest, tax, depreciation and amortisation (EBITDA) tumbling 31 per cent on weak prices in the six months to the end of December.
By contrast, Rio's iron ore EBITDA climbed 16 per cent in the same period, while Vale's rose 6 per cent and BHP's gained 3.5 per cent.
Fortescue, whose China sales dropped to 89 per cent of total sales in January-March from 95 per cent in the previous financial year, is now looking to other markets to take on more of its lower-grade ore.
"We are also continuing to develop markets across all the growth economies with customers in North and South-East Asia and India," Binjun Zhuang, group manager for China business development at Fortescue, said.
Robust profits for Chinese mills had helped drive demand for higher-grade ore, he said, but added that when profitability moderated, mills would refocus on input costs, increasing demand for products like Fortescue's.