Atlantic iron ore pellet market participants are bracing for a softer second half of the year as steel production drops and pellet supply potentially rises, with several European buyers still pushing back on proposed 2019 contract terms.
"There's a bit more fluidity and flux than normal in the Atlantic," a European market participant said, citing a slight uptick this year in spot bookings for pellet and fines — although liquidity is still very low.
The typical relationship between the European and Asian pellet markets is there, but some Atlantic buyers are pushing back this year and looking to challenge Asia's lead on contract structure. Several Atlantic buyers have settled their 2019 pellet supply contracts, agreeing on the switch to a 65pc Fe fines base and then rolling over 2018's Atlantic pellet premiums of $58/t for blast furnace (BF) grade and $62/t for direct reduced (DR) grade, market participants said.
But some of the larger European mills continue to push back against switching the pellet price base to a 65pc Fe fines index, telling Argus that "the conversations are still ongoing". Existing mechanisms enable counterparties to cope with such a situation, falling back on provisional pricing terms until settlements are reached, but there are issues from a credit risk perspective and it is unusual for some Atlantic settlements to remain unresolved into July.
Spot cargoes of Indian and Russian pellet are available in Europe, with the former typically pricing with reference to cfr China indexes but then subject to considerable discussion between counterparties. Argus yesterday assessed 64pc Fe 3pc alumina Indian pellet at $133.50/dmt cfr Qingdao, down on the week by $2.50/dmt.
A trader recently tried to place a cargo of Indian pellet in Europe but received no buying interest — the first time this has happened. "We had expected Indian pellet to take off in Europe quite a bit more, but the steel situation is really hitting," he said.
Cargoes of Russian and Indian pellet are often bought under three-month deals or 2-3 spot cargoes booked in a stretch, but this approximate rule of thumb might be liable to shift in the current climate, with buyers potentially just booking single ad hoc cargoes when needed.
"We began 2019 expecting another strong year, and overall the first half has been good. But the second half is definitely looking more difficult," a pellet producer said. He pointed to a drop in demand in the past two months as several mills cut steel production and an anticipated rise in seaborne pellet supply in July-December from Vale, Rio Tinto's Iron Ore Company of Canada and Bahrain Steel.
For now, the producer's operations and sales are looking solid, with all 2019 tonnes committed under term contracts, all of which have been settled using a 65pc Fe fines index base plus a rollover of 2018 pellet premiums. But he said he might consider offering some shorter-term contracts when it comes to negotiating 2020 supply deals, if customers wish to move in that direction.
Another market participant said six-month contract structures might increase in popularity, aligning with a gradual shift towards shorter contracts in some other parts in the ferrous complex. One such case is the European steel market, where mills have offered customers with half-year contracts a move to quarterly supply and pricing amid protracted term-supply talks.
