Quarterly iron ore pellet premiums settle lower

Quarterly iron ore pellet prices have settled at a lower level compared with the previous quarter, in line with weak demand prospects outside China.

Direct reduction-grade pellet settlements were discussed and settled around $27/dry metric tonne (dmt) basis to the 65pc Fe index, down from around $30-31/dmt settled in the second quarter. Middle East markets were discussing a settlement around $27-29/t basis 65pc Fe index for the third quarter, a market participant told Argus.

But blast furnace-grade pellet premiums were being settled and discussed around $20/dmt, down from above a $25/dmt settlement in the second quarter.

Sentiment among steel mills in Europe remains bearish in the aftermath of the Covid-19 lockdowns across the region. Despite signs of recovery such as service centres in Italy reopening, they are still drawing on accumulated inventories. There continues to be north European mills still considering further production cuts in the third quarter with consumer demand yet to fully return.

Pellet requirements among European mills are mixed. Some had deferred second-quarter volumes, leading to less severe cuts in their third-quarter requirements. But others had taken receipt of all their second-quarter shipments. This will affect their ability to fully accept third-quarter allocations.

Asian market participants are uncertain about resurgent steel demand during July-September, especially for markets like Japan and South Korea, with adequate pellet supplies cited as why they expect lower levels for third-quarter pellet premiums compared with the second quarter.

"Given the narrow spread between lump and pellet prices, it would be unreasonable to accept high pellet prices for term contracts," a buyer from northeast Asia said.

The Argus 62pc Fe lump ore premium was at 10.20¢/dmt unit (dmtu) on 24 June, down from over 30¢/dmtu in early March, the highest level this year. The premium edged up to $10.80¢/dmtu yesterday. The 64pc Fe, 2pc alumina index was at $115.50/t cfr China on 23 June, down from around $121 in early March and lower than $130/t at the end of January, the highest level this year. Markets in China were closed over 25-26 June.

"While spot and term contract prices can have a gap and that is reasonable to expect, the term contract prices should not be too far deviated from current spot levels," an Asian buyer said. Another Asian buyer said that the outlook for steel demand was uncertain, with it difficult to predict whether steel mills in Japan and South Korea will boost production in the third quarter or continue cutting output.

"Steel outlook may be better towards the end of Q3. As for pellet supply, we see loss of demand from Asia, outside China, and Europe alleviating any tightness from Brazilian supply woes," he added.

Brazilian pellet producer Vale had revised its output guidance for this year to 35mn-40mn t, down from a previous estimate of 44mn t, according to its last quarterly update. The revised projections were based on first-quarter production, delays in the return of operations suspended because of a dam collapse last year and the impact of Covid-19.

Pellet stocks ample in China

Rising pellet inventories in China are putting pressure on spot prices, a Shanghai-based trader said about last week's 7.9mn t of stocks at Chinese ports, which increased to 8.4mn t by 26 June.

"A 65pc Fe Ukrainian pellet cargo fetched a premium of $10/dmt to an August 65pc Fe index and I think that is the market level now," the trader said, adding that the narrowing spread between 65pc and 62pc grade iron ore has helped support pellet premiums.

The Chinese market's appetite for pellet premium was much lower than the $20/dmt levels for blast furnace pellet that buyers outside China had agreed, a Singapore-based trader said.

Other spot deals last week included a Ukrainian cargo at a $14/dmt premium to a July 65pc Fe index. A 64.99pc Fe Ukrainian cargo was offered at 1,035 yuan/wet metric tonne at Dongjiakou port on 25 June, while a Russian cargo was offered at the same price at Rizhao port.

Spot pellet supplies to China are predominantly Indian-origin pellet. But this year's weaker demand from mills in Europe, Japan and other regions has seen more European and Brazilian pellet being offered to China.

By Kitty Xie, Siew Hua Seah, Deepali Sharma and China staff