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Expanding direct reduction iron ore pellet volumes from Russia, Ukraine and Canada, and US pellets helping meet a recovery in European steel demand are shifting pellet supplies available in the Atlantic and Middle East, setting up dynamic pricing shifts under long-term contracts, according to iron ore and steel market participants.
Potential for different iron ore suppliers to tweak volumes and grades to secure higher premiums may be leading the market into a game of musical chairs. Buyers are yet confident they can maintain Q1 supplies of blast furnace grade pellets, ahead of long-term growth in DR pellet demand in Europe and Russia, and a resumption in semiconductors and components which may fire up auto steel demand in Europe by the second half of 2022.
Iron ore suppliers are seeking increases to pellet premiums in the first quarter from their Q4 settlements, with some looking for as much as a $15/dmt increase to take into account weaker levels in Q4 and lower iron ore base prices and steeper netback adjustments for pricing out of North America, Russia and Ukraine.
High steel prices and indicative margins continue to support pellet use, even as a recovery in steel production rates may have slowed, with China’s steel and iron production peaking in the first half of 2021.
Higher carbon market prices in Europe at over Eur90/mt in December and interest in lower emissions carbon accounted steel may ensure efficient pellets are prioritized. Strong ferrous scrap, pig iron and hot-briquetted iron prices also support pellet demand. Headwinds to EU flat steel production growth due to chip shortages and building flat steel inventories may still sap demand for high-grade raw materials and marginal hot metal rates, a steel procurement executive warned.
An $8/dmt quarterly increase for Q1 was reported by miner Vale for blast furnace pellets, understood to cover a few million tons of volumes to mills in Brazil and Argentina, and some additional sales into northeast Asia under long-term contracts tied to pellet plants in Tubarao, Brazil.
Vale’s $55/dmt settlement for blast furnace pellets on a 65%-Fe fines basis, compared with $47/dmt on a 65%-Fe fines basis in Q4.
When the Q4 premium is evaluated on a 62%-Fe fines basis, with spot and contract freight terms, iron ore suppliers marketing pellets into Europe look to secure further premium increases. Overall prices under 62%-Fe formulas lagged Vale’s estimated prices, based on its index and freight terms, according to suppliers.
IODEX 62%-Fe fines netback to Brazil, a benchmark for Atlantic iron ore product contracts, in November hit the lowest in two years to $66.351/dry mt FOB Tubarao, hitting pellet invoices with formulas tied to spot Brazil-China Capesize rates.
Europe pellet premium offers
A buyer in Europe on Dec. 14 cited no firm offers for Q1 pellets, and any initial discussions had not included any increase to premiums of over $8/dmt. Settlements may be drawn out through January, even as a major buyer is working on finalizing some pellet business this month, with another procurement source citing plans to get a rollover to BF premiums from Q4 “in principle.”
Russian and Ukrainian miners including Metalloinvest, Metinvest and Ferrexpo see growth in DR pellet demand and stronger domestic demand for pellets limiting blast furnace-grade pellet availability in Europe next year.
Ferrexpo is dedicating a pellet line to producing DR-grade pellets. Ferrexpo has been supplying Voestalpine with blast furnace and DR-grade pellets for the past two years, shipping into Corpus Christi, Texas, where Voestalpine operates a Midrex-based hot-briquetted iron plan. Ferrexpo is shipping its new product into other DRI plants, with Metinvest and Metalloinvest also shipping DR pellets from Black Sea and Baltic terminals.
Some DRI and integrated EAF plants have tighter tolerances on iron ore and DRI impurities, leading to stronger reliance on pellets from LKAB, Vale, Bahrain Steel and Samarco. Bahrain Steel has seen strong demand from its regional DRI customers and SULB for DR pellets, leading the merchant producer to procure optimal feeds to meet exacting DR pellet impurity levels. Output hit nameplate capacity at its two modules, without any blast furnace pellets being produced.
New DRI plants, especially those producing HBI for shipping and plants with flexibility to operate with a range of iron ore pellets and lump, are increasing their exposure to new DR pellet quantities, and can use BF pellets as well in a blend.
Blast furnace pellet volumes in Europe under contracts which expire may see an impact as more volume shifts to DR pellet and other markets, as well as retained for captive use.
China market
Iron ore marketers have said that China currently remains unattractive for spot pellet sales on high freight costs, even as spot blast furnace pellet premiums for Chinese imports recovered for 65%-Fe grade assessments in Q4, according to S&P Global Platts assessments. Future demand for DR pellets in Russia, Europe and the MENA region, and higher premiums available for high-grade pellets, may limit tonnage for China’s BF plants which will rely on domestic pellet plant expansions and concentrate supplies.
Miners accessing Capesize shipments from the Black Sea may clear some volumes of iron ore products to China, particularly lower grade pellets or concentrates, while maintaining or expanding pellet volumes to contract customers in Europe, the Middle East and North Africa.
US-origin unfluxed taconite pellets have found wide acceptance at several blast furnaces in Europe, with users comparing the pellets with higher-grade Russian acid pellets, with high ratings for strength and reducibility.
South African lump ore, especially higher grade 64%-64.5% product remains priced based on 62%-Fe indices and tracks currently weak China spot lump premiums, and is utilized due to current good value in use, providing optionality to using more pellets instead, a buyer added.
He saw the increased carbon emissions associated with charging South African lump ore as much smaller than when using Australian lump, which has a greater loss on ignition due to inherent moisture in Australian ores.
New pellet plants confirmed and speculated for development in Ukraine, Russia, Turkey, North Africa, West Africa, South Africa are yet to come onstream, limiting volumes to the additional US pellet flows opened up by trader Javelin from its terminal in New Orleans.
North American pig iron production rates have recovered sharply this year, and US and Canadian hot metal production is 100% reliant on pellets, which may temper further growth in export volumes. North American pig iron increased 24% to 26.35 million mt in the first ten months of 2021, which would require around 8 million mt of additional 65%-Fe pellets, according to Platts calculations.
Source: Platts