Atlantic iron ore pellet premiums are poised to increase to around $60/t for 2018 supply deals into Europe as availability remains tight and China's pollution focus is raising overall demand.
A major producer has started its 2018 negotiations, offering a premium of around $59/t for typical blast furnace (BF) pellet with 65pc Fe content, and a premium of around $62/t for direct reduced iron (DRI) pellet, market participants said, with one describing these levels as historically very high.
This compares with 2017 premiums in the region of $45/t for BF pellet and $53/t for DRI pellet, albeit with variations depending on the region, counterparties and precise product specifications. The pellet premium is to the reference 62pc Fe fines index.
A precedent for these 2018 offer levels has been set, with some pellet spot trades done close to that price range shortly before the producer put its offers forward, a market participant said, noting that supply of pellet to Europe is fairly tight.
China's stricter environmental enforcement is increasing its demand for pellet and higher-Fe ores. Indian pellet 64pc Fe basis was sold in north China portside cash markets at a seaborne equivalent price of $132-134/t cfr north China last month. Seaborne offers are lower at $127/t for December delivery last week, the highest this year.
Winter restrictions on north China steel output unravelled earlier forecasts that non-China market pellet premiums would drop to around $33/t for 2018, which reflects how pellet market sentiment has become significantly more bullish in recent months.
Market participants noted with interest that discussions on 2018 DRI pellet premiums are being launched at the same time as for BF pellet premiums, with some even anticipating that there may be cases where DRI pellet premiums are settled before those for BF pellets.
Annual BF pellet premiums are typically negotiated first and then used as a baseline for negotiated premiums for DRI pellet.
Several other pellet suppliers to the Atlantic market have yet to issue their 2018 offers, and some price variation is expected according to product. Parties that structure contracts around alternative fiscal rather than calendar years will not be starting the next round of negotiations until early next year.
A trader suggested that the narrowing differential between BF and DRI pellet premiums — which has contracted from its traditional level of up to $10/t to less than $5/t, based on the above 2018 offers, in large part because of the 2015 idling of the 25mn t/yr Samarco operations in Brazil having tightened DRI pellet supply, pushing up usage of BF pellets — could mean there is less scope for buyers to negotiate down the premium for DRI pellets. Samarco — which is jointly owned by Brazilian mining firm Vale and UK-Australian resources company BHP — has been slated for a possible restart in the second half of 2018, but many market participants question whether that timeframe is achievable given past delays and the regulatory processes that must first be gone through.
Opinions diverge about how quickly 2018 pellet premiums might be settled in Europe for those basing it on a calendar year, with expectations ranging from December until as late as March. If discussions were to drag on until March, European mills could start receiving 2018 pellets on a provisional pricing basis, to be revised once full-year negotiations have been concluded. Those counterparties structuring annual supply contracts around alternative fiscal years may still be negotiating beyond March.
With more pellet supply scheduled to come online in the first half of 2018, it is possible that those buyers who are willing to hold out could secure a lower price, depending on how other fundamentals also develop, one market participant said, but another cautioned that it remains to be seen exactly how much of that supply will come online in the months ahead. A trader added that if they were buying, they would be inclined to wait and see how broader pellet demand develops.
European buyers and sellers are monitoring China closely to see how environmental restrictions and production cuts will impact the ferrous market in the weeks ahead.
So far this year, policies have been supportive. Domestic concentrate mines have closed because of tougher environmental scrutiny, and pelletising capacity has been reduced from emissions limits, leading China to rely more on imports to meet pellet demand.
Market participants have not seen any significant redirection of product from the Atlantic basin to China, with freight rates eroding much of the appeal that Chinese price levels might hold.
Most of China's pellet purchases are of Indian and Ukrainian origin, although a recent deal for European pellet delivered into China was reported at above $60/t premium to the 62pc index although the deal and details such as loading dates could not be confirmed.
