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Record spot steel prices and margins in Europe and the Americas are supporting higher iron ore pellet premium offers for second-quarter volumes, even though buyers are concerned that a lag with contracted steel sales may push realized margins down.
The rapid ascent of HRC spot steel prices to Eur850/mt ($999/mt) ex-works in Europe in the week of March 28 may heighten comparisons between contract steel pricing with index-linking forward steel sales. Raw materials are largely based on spot prices, and iron ore pellets typically price using iron ore fines spot prices with negotiated premiums on a quarterly basis.
Higher spot steel prices have not been captured into steel sales agreed before year-end, which may be fixed for longer terms, according to steel producers.
Several buyers have turned down blast furnace pellet premium offers for Q2 heard at around $52/dry mt on a 65% Fe fines index basis, with 62% Fe basis premiums heard tabled above $70/dmt with discussions in Europe heard typically in the $60-$70/dmt range for European pellets.
Miner Vale has offered global contract customers $52/dmt premiums to 65% Fe index for Q2 for blast furnace grade, and will manage tons with other pellet segments rather than negotiate levels to ensure maximum performance, according to market sources familiar with Vale’s policy.
The pellet offers indicate an increase of as much as around $25/dmt from eventual Q1 settlements for high quality pellets on a 62% Fe fines basis. The difference in quarterly premiums for large pellet users translates to an increase in the tens of millions of euros, a buyer said. The increase is unacceptable as steel mills contended with higher costs and losses in 2020 and are slowly recovering profitability, one source added.
HRC futures in Europe are currently in backwardation, with March 30 indications averaging well over Eur700/mt in the second half of 2021, far higher than prices last year. S&P Global Platts’ North Europe HRC spot assessment averaged Eur471.32/mt ex-works Ruhr in 2020.
There is limited European flat steel capacity to expedite earlier disruption in steel supplies and mill curtailments with the rebound in orders, with steel imports into the EU tracking safeguard measures and volume quotas.
Strong forward steel prices may embolden market price sentiment, with backwardation seen in iron ore fines prices, used as the basis for pellet and lump invoices.
STEELMAKER WARNING ON STEEL MARGINS
Steelmakers have warned an increase in quarterly iron ore pellet premiums may come as steel prices start to decline, with steel volumes available to book and perform at higher prices restricted by earlier orders at lower prices.
A steel producer saw HRC prices in Europe sticking at higher prices for longer, and said it was unlikely HRC prices would collapse suddenly in Q2. However, a weaker forward 62%-65% Fe spread from close to $30/dmt currently could lead to difficulties for higher priced premium settlements on a 62% Fe basis, he said.
Stronger iron ore supplies are said to be indicated by Vale for its northern Carajas high-grade fines operations after the Q1 rainy season, which could lead to difficulties for higher fixed price premiums settling on a 62% Fe basis, he added.
A recovery in steel orders since the second half of 2020 followed a ramp-up and restart at some regional steel facilities — which were turned down or idled rapidly in Q2 2020 during the initial COVID-19 pandemic restrictions on industrial facilities and auto plants. This continues to lead to long lead times.
Iron ore pellets improve emissions performance at steel mills, and are seeing stronger demand as utilization rates rise and companies focus on emissions reporting. An increase in EU carbon permit prices this year has increased the appeal of pellets, which can reduce met coke consumption, and coal products used in iron ore sintering.