Atlantic pellet: Uncertainty prevails, 2Q in focus

Uncertainty is prevailing in the Atlantic iron ore pellet market, with negotiations for 2019 supply contracts dragging on and market participants attempting to take stock of seaborne supply fundamentals that have been thrown into disarray in recent weeks.

In Europe, there is a lot of scrutiny of second quarter pellet delivery schedules, which are being analysed and adjusted. "Mid-February is a crucial time for mills to nominate the exact tonnes and laycans they need for the second quarter," one European market participant said, adding that some buyers are voicing concern that a lack of price consensus beyond 15 February might leave their shipments vulnerable to delay.

"There are some concerns right now that if mills can't agree on second quarter pricing by 15 February, Vale could prioritise tonnes for that period towards other customers that have already agreed on the price and then make up the balance owed to that customer in the second half of the year, for example," the same market participant said.

Vale has not stated any such intentions, and another market participant said it is more likely that provisional pricing terms would be used for the second quarter, to then be revised at a later stage. But he added that to fix these quarterly schedules one would want some certainty about the demand and supply pictures, and the latter is lacking.

There is uncertainty about medium-term pellet supply in the wake of multiple production cuts since the fatal tailings dam rupture in Brumadinho, Brazil, on 25 January. Vale announced a gradual suspension of its 11mn t/yr pellet-making facility in Minas Gerais, after which the government shut down the firm's wastewater treatment plant at Tubarao port on 7 February, forcing the company to suspend some additional pellet-making operations with combined capacity of 15mn t/yr.

A trader voiced particular concerns surrounding the halt of the Tubarao plants, given that their output closely impacts the European market. That said, Vale has today been allowed to resume operations at Tubarao, bringing those pellet plants back on line.

Seaborne pellet supply is potentially only slightly down on the year, taking into account the fact that Vale restarted some facilities only within the past 12 months, one market participant said. But he added that there is so much uncertainty and so many moving parts that it is almost impossible to accurately read the overall demand-supply balance going forward.

European mills are understood to be fairly well covered for January-March supply, having finalised delivery schedules in the fourth quarter. Mills' iron ore stocks are understood to be fairly healthy, and sources at Rotterdam's EMO terminal confirmed strong iron ore stocks of 2.6mn t earlier this week — down from a year-to-date high of 3.6mn t in mid-January but still comfortably in the range of 2018 averages.

Price talks continue

Discussions for 2019 Atlantic pellet contracts structured around the calendar year — as opposed to those structured around the fiscal year beginning on 1 April — had been dragging on late even before the Brumadinho disaster threw supply fundamentals into doubt. Negotiations were initially rattled by falling steel prices in November, and then by Vale's decision to try and move to a 65pc Fe fines base for pellet contracts in December.

Since Vale's move, Atlantic buyers have sought more time to evaluate this new dynamic, with several mills reluctant to accept the firm's attempt to switch the base from the traditional 62pc Fe fines index.

It is not unprecedented for calendar year Atlantic pellet negotiations to continue beyond February, but it does compound the general sense of uncertainty.

Market participants are struggling to peg where Atlantic pellet premiums are, without 2019 settlements available to provide an anchor. There are some reports of market participants referencing 2018's blast furnace (BF) premium of $58/t with a 65pc Fe fines index as the base. Others still allude to premiums of $65-75/t, in line with November discussions before Vale's announcement of a potential switch to the 65pc Fe fines base.

Vale may accept a rollover of 2018 Atlantic premiums — of around $58/t for BF grade and $62/t for DR grade — if the mills agree to switch to a 65pc Fe fines base, a source said. But no firm settlements had been seen by the time Argus went to press.

Overall, European mills voice strong concerns about the recent surge in seaborne fines prices. "There's no way steelmakers can afford a $20/dry metric tonne (dmt) increase in iron ore costs. The price has to come down," one mill said, anticipating that prices for 62pc Fe fines will extend the losses seen in the past two days and eventually stabilise near mid-January levels.

Another European mill said fines prices may move up or down in the near term, but the one likelihood is volatility, with the market having become reactionary and sensitive to every new development.

The Argus ICX 62pc Fe seaborne fines price is $86.40/dmt cfr Qingdao today, down from a 12-month high of $90.75/dmt on 11 February but up from $72.40/dmt at the start of 2019.

Alternative supply sources

A trading firm said it has received enquiries for pellet from multiple buyers globally seeking alternative supply sources. Indian exporters have indicated to the trading firm that they have availability, but said they are first waiting for clarity on price direction from China following the lunar new year holiday. And they may drive a hard bargain, committing extra tonnes only to those willing to pay the most, the trading firm said.

A couple of European mills trialled Indian pellet last year — a move that took some by surprise given that European mills have traditionally considered Indian pellets to be of too low a grade. Some market participants now see scope for a bit more high-grade Indian pellet making its way towards Europe, given supply tightness, but they do not expect it to become a mainstream product in the continent.

In Sweden, there is speculation that domestic mining firm LKAB might be able to lift output slightly this year by making efficiency adjustments. But overall, LKAB's facilities are already at capacity and working to make up lost 2018 volumes after the company last year brought forward some maintenance work scheduled for 2019 and suffered some additional disruptions.

There are also questions about how reduced availability of high-grade iron ore products will affect other raw materials. European blast furnaces are estimated to use m 33-49pc pellet in their iron ore burdens, depending on the facility. Some market participants see potential for further switching out of pellets for lump, although some European mills have already pushed the pellet-lump ratio as far as it can go, Argus understands. And there may be a renewed focus on metallurgical coke quality, as blast furnace-based operations strive to lift the grade of other inputs to offset the metallurgical impact of any drop in overall iron ore quality.