A flight to quality in the global iron ore market has exploded the gap between different grades of the commodity, with higher-quality material now costing about twice as much as the lower-grade product. A ton of top-tier 65 percent content ore was about $100 this week compared with less than $50 for 58 percent ore, while benchmark 62 percent material was between the two at about $76, according to Metal Bulletin Ltd. At the start of last year, the gap between 58 and 65 percent ores was less than $10. Iron ore has surged since mid-June as reforms in China have helped to sustain demand for steel at the same time that officials are tightening up on pollution curbs and weeding out illegal plants before a Communist Party congress this fall. All of that has stoked demand for higher-grade iron ore, which both causes less pollution and allows mills to maximize output, enabling them to take advantage of robust profit margins in the world’s largest producer. Maximize Productivity Mills “would want to maximize their productivity by using higher-grade ore to capture as much revenue as possible,” said Hui Heng Tan, an analyst at Marex Spectron. While the main determinant for grade purity is the iron content, impurities such as alumina are also considered in assessing prices, he said. The government in Australia—home to exporters Rio Tinto Group, BHP Billiton Ltd. and Fortescue Metals Group Ltd., three of the world’s four biggest shippers—has been tracking the trend. In its latest quarterly resources outlook, it noted that prices of 58 percent ore were 27 percent lower than 62 percent in April to May, compared with an average of just 14 percent since 2012. Among factors pushing out the spreads was the environmental campaign. The more stringent rules are driving “a growing preference for higher-grade iron ore, which increases the efficiency of steel mills and reduces emissions,” Australia’s Department of Industry, Innovation and Science said. ‘Terrible Pollution’ “If you’ve got this terrible pollution in the big cities, people are not happy and the government cannot afford that,” said Philip Kirchlechner, director of Iron Ore Research Pty, adding that this year is especially important with the political transition looming in China. “The only way steelmakers can maintain production is if they put high-grade ore into the blast furnace.” Steel production in China has been running at a record pace this year even as some plants have been shuttered, and a manufacturing gauge for the nation’s mills rose in August to a 16-month high, boosting iron ore futures. The upswing has helped to absorb rising ore supplies from Australian miners as well as Brazil’s Vale SA, which is bringing on high-grade output from its S11D project. “In an oversupplied market, you’ll see that flight to quality,” Julian Kettle, vice chairman of metals and mining at Wood Mackenzie Ltd., said in an interview in Singapore, referring to the high grades. “We anticipate the maintenance of those differentials over the next two to three years.” ‘Right Grade’ Rio Chief Executive Officer Jean-Sebastien Jacques said China needs higher-grade ore to produce better quality products as it reforms its steel sector. The company is prioritizing production of higher-grade material over lowering costs, he said on Wednesday at the opening of the Silvergrass mine. “What is important is being able to provide the right product, with the right grade, to the right customers,” Jacques told reporters onsite in the Pilbara. For Chinese mills “to produce the right output they need to have better quality raw materials, including the grades that we will produce at Silvergrass.” Evidence of mills’ changing preferences is showing up at China’s ports, where stockpiles of ore surged to a record 141.5 million tons in June, before easing off in recent weeks. Rio has estimated it’s lower grades that accounted for 80 percent of the increase in the holdings in the 12 months to July. Higher prices of coke—which is made from coking coal and fed into furnaces to produce iron and remove impurities—may also be boosting a preference for better quality ore. When coal surges, as happened last year and early 2017, mills can respond by using more high grades so production’s more efficient, said Kirchlechner, a former marketing head at Fortescue. “The only way you can reduce the coke is by having less impurities going into the blast furnace, so in other words, high grade,” Kirchlechner said from Perth. “It could go on, but I think there’ll be resistance to a higher premium,” with some buyers suggesting 65 percent prices have “gone a bit too far,” he added.