Atlantic iron ore pellet: Supply squeeze buoys premiums

Market: Metals
14/12/23

Supply tightness owing to weather disruptions in Brazil and signs of demand recovery have lifted Atlantic iron ore pellet premium settlements for the first quarter of 2024.

Brazilian iron ore mining firm Vale concluded its pellet premium definition process for direct reduction (DR) pellets for the January-March quarter at a $55/dry metric tonne (dmt) premium to a 65pc Fe index, up by $7/t dmt from the fourth quarter. The blast furnace (BF) pellet premium is up $5/dmt on the quarter to $45/dmt.

Brazil is expected to experience the strongest "level" of the El Nino phenomenon in December and January, leading to heavy rains and extreme heat in some parts of the country, said Brazilian meteorological firm Climatempo. The November-January period is also historically the wettest time of the year in the southeast region, including the iron ore-producing Minas Gerais region, said Brazil's national meteorological institute, Inmet.

A shortage in pellets and in particular high-grade pellets in Europe continue to be supporting factors for the higher premiums as deliveries from Ukraine and Russia remain impacted by conflict between the two countries.

In addition, blast furnace production in Europe has largely recovered from a string of idling and maintenance periods in the third quarter and through to early December, where the equivalent of over 10mn t/yr in capacity was off line. The last significant restart would be one of Tata Steel's two Ijmuiden furnaces scheduled for January after it was taken off line for relining in April.

But some market participants remain cautious about calling the start of a recovery in Europe. "The market situation in Europe still suffers from lower utilisation rates and less confidence. Even with some idled capacity coming back into operation, the reason might not entirely be due to the underlying steel demand but rather to maintain free carbon allowances," suggested one Atlantic pellet producer. European mills potentially stand to have their free carbon allowances cut if they run at reduced utilisation rates for prolonged periods.

European hot-rolled coil (HRC) prices appear to have reached a floor early in the fourth quarter, as mills pushed for higher prices and some buyers that were expected to restock after the holidays have purchased ahead instead. The Argus daily northwest Europe HRC index stands at €685.60/t ex-works today, up from €600.25/t ex-works on 17 October.

The bearish market in the fourth quarter had meant that other pellet producers in the Atlantic have also only recently settled their premiums for the fourth quarter and just started discussions for premiums in the upcoming quarter.

Higher scrap prices might instead have been the driver behind the stronger pellet premium for the first quarter, said another Atlantic producer. The Argus daily HMS 1/2 80:20 cfr Turkey assessment ended a six-week long ascent yesterday at $425/t up from $350.80/t on 25 October. The producer also noted a number of DR and BF pellets being offered on the spot market in the fourth quarter. "Not sure if those demand-side issues are resolved but those spot pellet cargoes found homes rather than going unsold," the source added.

A stronger Chinese iron ore market has lent support to the pellet premiums next quarter as well, with improving Chinese steel production and consequently stronger raw material demand pushing the Argus ICX 62pc Fe index up to $135.70/dmt cfr Qindao today from the year-to-date low of $97/dmt on 25 May. The weekly Argus 63pc Fe, 3.5pc alumina pellet index was assessed at $143/t on 12 December, up $4/dmt on the week. The 63pc Fe, 2pc alumina index was assessed at $151/dmt, also up by $4/dmt.

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