insight MAY 201436

IRON PELLETS

Prices of direct charge iron ore products have recently been bolstered by China’s eff orts to cut air pollution, with steelmaking deemed by Beijing as a major emitter. Pellet premiums for 2014 have reached multi-year highs as a result.

As China’s pellet consumption increases, it is likely to become an increasingly important part of the product’s price discovery, much as it has become the hub for lump and fi nes pricing.

Traditionally negotiated as an annual price between Brazil’s Vale and steelmakers in Japan and South Korea, the 2014 pellet premium was settled at $38/dry mt, a $10/dmt jump over the previous year, and the highest since 2011. Vale idled three pelletizing units in Brazil in late 2012, owing to softer demand, and had no immediate plans to restart them when it provided an annual outlook.

Chinese buyers have for some time treated most contractual commitments lasting longer than a month or quarter as anathema. Where spot prices fall below contractual agreements, mills in the country have been known to default on term tonnage, opting for the cheaper supply.

And European mills have mostly rejected following an annual “benchmark” set by Japanese and Korean mills, with most opting for a quarterly settlement. Paying even higher than $38/dmt for Q1, buyers – with one eye on China and another on Brazil’s new capacity starting as early as May – believe they can claw back premiums later this year.

China could revolutionize global

iron ore pellet trade.

HECTOR FORSTERTeam LeaderLondon

KEITH TANManaging EditorSingapore

PELLET PREMIUMS IN

HIGH GEAR

One of the world’s largest blast furnaces – at Nippon Steel’s Kimitsu Works, on Tokyo Bay.

Courtesy: Joe Innace

37MAY 2014 insight

IRON PELLETS

Many Europeans opting to pay higher premiums than $38/dmt in the interim are already optimistically talking about lower pellet premiums in Q2 somewhere in the $30s/dmt range, armed with lower spot deals occurring in China and a credit-driven steel sector implosion that took hold in Q1.

But buyers opting for quarterly pricing may end up disappointed, likely paying more than $38/dmt through the year, suggests Macquarie Bank. “We would expect agreed pellet premiums for later this year to be in the low $40s, with European demand continuing to pick up and Vale’s Tubarao and Sao Luiz pellet plants remaining offl ine,” notes Colin Hamilton, head of global commodities research at Macquarie in London.

China wielding double-edged swordChina’s eff ort to weed its domestic steel industry of obsolete capacity, by limiting credit, has softened iron ore demand. Consequently, prices of benchmark fi nes have declined substantially, falling to around $100/dmt in early March before rallying in April.

And China’s annual steel output growth is estimated to slow to 3.5% this year, down from the breakneck – and what some deemed unsustainable – 7.5% growth in 2013. Th is will clearly impact ore demand.

Australian iron ore production is also set to surge as a round of investments in mines and logistics approved around the time of the “commodity supercycle” fi nalize. Australia’s Bureau of Resources and Energy Economics expects the nation’s iron ore exports to rise annually by 23% to 650 million mt in 2014.

But Macquarie expects supply of lump to remain constrained. Lump and pellet are mutual substitutes. “Lump proportion mined at some of the key ore bodies is falling, so this on its own is not enough to off set pellet demand,” Hamilton adds.

And Beijing’s moves to further clamp down on sintering, coke ovens, and steelmaking may ensure stronger demand for higher-grade ores for mills to boost effi ciency, Macquarie said in January. “Sinter plants in particular have stringent criteria for SOx emissions. To alleviate this mills in China continue to raise their use of pellet,” Hamilton notes.

DRI pellet provides ‘twist’Perhaps a twist in the pellet story, new capacity may primarily be destined to become direct reduction material for use in electric-arc furnaces.

Vale, which has ramped up pellet output in Oman, signed a potential six-year pellet supply agreement with DRI-based Qatar Steel in March and has said previously the new Tubarao VIII unit in Brazil would be earmarked to largely serve DRI expansions in the US.

US miner Cliff s Natural Resources has said investments in DRI could lead to it supplying the EAF market as its “ability to produce DR grade products is optimized.” Voestalpine and Nucor have built, or are in the process of building, DRI plants in the country.

Th e concurrent changes in DRI-based steelmaking and demand for the usually higher Fe specifi cation pellets, amid such tight marginal supply for pellets generally, could push aside demand-led dynamics in the far larger blast furnace pellet market. Ferrexpo said in March strong Middle ►

insight MAY 201438

IRON PELLETS

East demand for DRI pellet had reduced availability in the overall market.

How pellet producers tailor their portfolios between markets and regions as new volumes enter the market may be important to how fast pellet premiums can fall.

In fi rst-half 2014, Vale’s 7.5 million mt/year Tubarao VIII and Samarco’s 8.25 million mt/year No. 4 plants are set to come on stream. Both will take time to ramp up and may switch between DRI and blast furnace pellets based on market conditions.

Globally there may be around 330 million mt of blast furnace pellet consumed and 90 million mt of DRI pellet, estimates Macquarie.

A European buyer downplayed concerns heard by other integrated mills that new

pellet capacity in Brazil may not do much to alleviate pressure in the short-term, given potential for DRI. He said the pellet market would benefi t directly or indirectly from the additional supply, as the entire market readjusts to accommodate whatever is produced.

Th ere is some substitutability for DRI with BF pellets. A Russian producer was heard selling a high Fe BF pellet into India for a sponge iron application late last year.

China price roleTh e Chinese steel industry is inclined to use short-term pricing by the very nature of its domestic market framework for fi nished steel products and raw materials. Price renegotiation risk and distressed cargoes popping up due to “price majeure,” along with sporadic swings in credit availability in China, routinely challenge international miners and traders.

As China buys more seaborne pellets and lump, along with high-grade fi nes and concentrate pellet feed, arguably it stands to infl uence global pellet pricing even more.

Pellet invoices already use the Platts IODEX CFR China iron ore fi nes price as the basis of the fi nal price charged, including an iron units quality adjustment and a premium on top to cover pelletizing costs and extra value-in-use provided to the steelmaker.

Th e premium over price made up of IODEX and the multiple of the Platts 1% Fe mid-range diff erential value has come down for many higher-grade products. Premiums for some high Fe fi nes have declined recently from +$9/dmt to $2-3/dmt in spot deals.

Source: Platts

0

1

2

3

4

5

6

7

100

110

120

130

140

150

160

170

180

1/0

2/2

01

3

2/2

2/2

01

3

3/1

3/2

01

3

2/0

4/2

01

3

4/1

9/2

01

3

9/0

5/2

01

3

5/2

9/2

01

3

6/1

7/2

01

3

4/0

7/2

01

3

7/2

3/2

01

3

8/1

3/2

01

3

8/3

0/2

01

3

9/1

8/2

01

3

7/1

0/2

01

3

10

/25

/20

13

11

/13

/20

13

2/1

2/2

01

3

12

/19

/20

13

9/0

1/2

01

4

1/2

8/2

01

4

2/1

7/2

01

4

6/0

3/2

01

4

$/DMT $/DMT

IODEX 62% Fe + 3*Mid Range Diff IO fines 65%

Premium for 65% Fe over IODEX 62% Fe + 3*Mid Range Diff (RHS)

HIGHER-FE IRON ORE PRICES STRENGTHENED IN SECOND-HALF 2013

39MAY 2014 insight

IRON PELLETS

Th e surge in the extra premium over the two price components last year for 65% Fe grade fi nes may help partly refl ect the $10 increase achieved in annual pellet premium (see graph).

Spot seaborne pellet trade is still irregular as much of global capacity is tied up in long-term contracts, so volumes are building slowly. Large trading houses and CIS producers are heard selling spot, and some Brazilian Samarco high Fe material sold late last year achieved premiums of $40-45/dmt.

Since then, China pellet premiums in spot deals were at $30-35/dmt and later dropped to $27-28/dmt, one trader said.

In the meantime, spot prices in China of lump ore, high-grade Brazilian and Venezuelan fi nes and pellet feed are

becoming more scrutinized by mills globally seeking to extrapolate changes in their relative premiums over spot fi nes and what that means in pricing for their specifi c iron ore pellets.

Th e Platts weekly spot lump ore assessment for imports into China, for example, saw a straight seven-week decline in February and January. February averaged at $0.2338/dmtu, down from $0.27/dmtu for January.

But the fi nal say on prices may come down again to Chinese demand and eventual steel growth. As a Chinese mill source maintains, regardless of pollution, if steel margins are very weak many plants will cut crude steel output on tight credit and low profi tability. Th is bodes badly for higher-priced imported lump and pellets. ■

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