Weak demand among Chinese and Japanese steel mills is delaying settlements for third-quarter premiums on blast furnace (BF) iron ore pellets and pushing discussion levels lower.
The $88/dry metric ton (dmt) third-quarter BF pellet premium indicated by Brazilian mining firm Vale in early-June was heard to have only been taken up by a small number of South Korean steel mills. Most Japanese mills are understood not to have settled their premiums for the quarter. Some mills have since secured lower BF pellet premiums for their long-term contracts, at around mid-$70s/dmt to low-80s/dmt, an international trader said.
Vale was heard to have been offering more aggressively in the spot market, with non-Tubarao pellet available in the Asian market at a premium of $55/dmt. But these offers are only relevant for volumes rolled over from the second quarter, market participants said. This level is still well above the Chinese price expectation, one trader said. The indicative tradeable level for Ukrainian pellet in China was at a premium of $21-23/dmt above a 65pc Fe index this week. A cargo of 65pc Fe Middle Eastern pellet with late August-early September laycan was offered at a premium of $20/dmt to a 65pc index on 5 August. And a 80,000t cargo of 65pc Fe Australian Grange pellet with early September laycan was offered at a premium of $18/dmt to a 65pc index on 16 August.
Crude steel production fell in Japan in June, likely as a result of Covid-19-related disruptions and part shortages slowing demand from the auto sector. As a result, Japanese iron ore demand has softened in recent months, with mills or traders reselling iron ore to Chinese buyers through tenders since April. A Japanese steel mill re-sold Vale 65.6pc Fe AF11 Pellet to China in a tender at $108.90/dmt cfr China on 28 April. Other grades being resold include pellets, Newman Blend Lump, Iron ore Carajas fines, Mining Area C fines, Yandi fines and Vale's Standard Sinter Feed Tubarao.
Chinese pellet demand has also been poor, as mills facing tighter margins in the past few months have reduced their usage of higher-grade ores, including pellet. "Demand for pellet has not seen much pickup at the port at all, despite mills' margins improving [since early August]. Some domestic pellet factories were understood to have closed recently because of weak demand," a Shanghai-based trader said. The Argus 63pc Fe, 3.5pc alumina pellet index was assessed at $116/dmt cfr Qingdao this week, down $4/dmt on the week. The 63pc Fe, 2pc alumina index moved down to $122/dmt. The pellet indexes have both fallen by over 40pc since early March this year.
Despite the weakness in BF pellet premiums, direct reduced (DR) pellet premiums are strong and are being settled or discussed at around $95/dmt, Vale indicated in June. Supply tightness has been the main reason for the strength in DR pellet premiums, Asia-Pacific, European and Middle Eastern market participants have said.
Europe still slow to settle
The macro environment of soaring energy costs and rising inflation has weighed on sentiment in the European market.
European mills have already been slowing steel output by idling blast furnaces, delaying restarts and carrying out maintenance at their facilities, and they are now acting slowly in agreeing third-quarter premiums.
"The deal that Vale made for its BF pellets is not any guideline for pellets to Europe," one Atlantic producer said.
The consumption of pellets is expected to be largely stable, but spot and near-term buying of top-up volumes will likely feel the first effects of any weakness.
Steep discounts have appeared to elicit buying interest among north Asian buyers on the spot market, but expectations of a drop in premiums for the third quarter are more conservative in Europe.
Vale indicated second-quarter pellet premiums within a day of the Russia-Ukraine conflict beginning in late February, and this has been cited as a reason for Vale now seeking to make up for this in the third quarter. Vale-BHP Brazilian joint venture Samarco settled its second-quarter pellet premiums at around $67/dmt over a 65pc index. This is $6.40/dmt higher than Vale's second-quarter settlement for BF, while the DR pellet premium settled at $70-72/dmt over a 65pc index, $4.20-6.20/dmt higher than Vale's premium.
