Atlantic iron ore pellet spot sales are expected pick up into China this year as suppliers shift supply from Europe, which is ailing from collapsed demand during the coronavirus outbreak.
The shift accelerates a trend begun in the second half of last year when weakness was already appearing in European demand. Chinese market participants expect more Atlantic pellet spot sales to China as measures aimed at reducing the spread of the virus stalls Europe's steel demand and forces output cuts.
"I think the only destination is China, as no other places can go for these surplus cargoes after the European steel mills' production cuts. We estimate that high-grade Atlantic pellet will see 500,000t-600,000t per month diverted from Europe to China after the cuts, likely from May or June," a Shanghai- based pellet trading firm said.
Atlantic pellet producers shifted indexation to 65pc Fe fines indexes last year, but weakness in the market has some trading companies quoting floating premiums to 62pc Fe fines indexes. Spot sales in China are achieving levels close to those in Europe.
High-grade Ukrainian pellet is selling at a spot premium of $20-22/dry metric tonne (dmt) to the 65pc index, according to an Argus survey. If indexed to the 62pc index, premiums are about $29/dmt, an international trading firm said.
Vale sells its AF73 and AF80 pellet in long-term contracts to major Chinese mills and through tenders in the spot market. Larger mills are the main targets for high-grade pellet in China, with smaller mills unwilling to pay the higher premiums.
Announcements have been made for cuts of an estimated 17pc of the EU's 87mn t/yr hot metal production as of 26 March, Brazilian mining firm Vale said last week. Steelmaker ArcelorMittal has led the cuts by reducing blast furnace output by more than one-third and declaring a force majeure on steel feedstock shipments in Europe.
Europe is not the only region for which steel weakness has driven iron ore shipments to China. A Japanese mill sold pellet sourced from Ukrainian iron ore pellet producer Ferrexpo at $115/dmt cfr China in an unconfirmed 27 March deal, below spot market levels for 65pc Fe Ukrainian pellet that usually prices much higher than 64pc Fe 3pc Al Indian pellet.
An estimated 18mn t of disrupted iron ore supply could soften the impact of the demand cuts, Vale said. One disrupted supplier is India, which increased pellet exports to China by 51pc to 9.8mn t last year. The country's 21-day lockdown has created a worker shortage that could reduce its mining output at a critical time when mine leases are transferring to new owners. Atlantic pellet supply could fill the gaps in Indian pellet supply or add to competition if India's exports remain stable.
The weekly Argus 64pc Fe 2pc Al iron ore pellet index, a higher-grade Indian specification, fell by $1/dmt to $117/dmt last week. The outright price implied a premium of $17.20/dmt to the Argus 65pc index that was at $99.80/dmt on 31 March. The 3pc Al pellet index at $114/dmt last week implied a $14.20/dmt premium for the lower-tier Indian pellet.
Pellet differentials in China's portside markets are similar to those in seaborne trade.
Ukrainian pellet prices are about 100 yuan/wet metric tonne (wmt) ($14/wmt) higher than Indian pellets in Shandong ports, a Rizhao-based trading firm said.
Indian pellet with 64.48pc Fe sold at Yn945/wmt at Lianyungang port and Yn945/wmt at Caofeidian port last week, compared with Ukrainian pellet that sold at Yn1,030/wmt in Qingdao last week, for a price gap of about Yn100/wmt, another trading company said.
Ukrainian pellet with 65pc Fe was offered at Yn1,045/wmt at Rizhao on 3 April and was tradeable at Yn1,030-1,035/wmt, giving a premium of Yn95-100/wmt to 64pc Fe 3pc Al Indian pellet. Removing moisture, the seaborne equivalent differential is $12-13/dmt, a Beijing-based trading firm said.
Indian pellet with 3pc Al traded at a similar discount to Vale pellet earlier in the year. In late January, Vale's AF73 pellet with 64.8pc Fe sold at Yn1,120/wmt, compared with 3pc Al Indian pellet selling at Yn995/wmt in Shandong in the same week.
China increased pellet imports by 63pc to 31mn t last year, putting it second behind Europe, the largest pellet importer, with 34mn t imports in 2019, Ferrexpo said in its earnings report last month. The producer increased shipments to China in response to weakness in Europe, with spot sales indexed to the 65pc Fe fines price, plus the prevailing spot pellet premium into China.
The Chinese market "tends to act as the market of last resort for exporters, with the spot premiums sometimes varying significantly from negotiated long-term contract pellet premiums", Ferrexpo said.
