Vale eyes 65pc Fe basis for 2019 pellet contracts

Brazilian mining company Vale is attempting to change the formula for its iron ore pellet contracts as it finalises 2019 settlements, switching from a 62pc Fe fines basis to a 65pc Fe reference.

Negotiations for 2019 pellet contracts are almost concluded and a price increase is under way, the company's executive director for ferrous and coal, Peter Poppinga, said. "I am not talking premium increase, I am talking price increase," he clarified.

The switch to using 65pc Fe fines as the basis is logical because the pellet feed being used typically has Fe content of at least 65pc, Poppinga said. "Both of those indexes — the 65pc [Fe fines] and pellets — are linked to productivity of the steel plants. So by switching to a 65pc index, there would be a natural hedge for the blast furnace guys who tackle any productivity needs."

Market participants have for some time speculated over whether pellet contracts might switch to using a 65pc Fe fines index as the basis, and opinion has tended to be split, with buyers in particular expressing reservations. Some market participants noted previously that any switch to a 65pc Fe base might be accompanied by a dip in the premiums themselves, somewhat balancing out the overall price.

Talk in the Atlantic pellet market lately has focused on possible blast furnace pellet premiums in a $65-75/t range for next year, but those numbers were predicated on the traditional usage of a 62pc Fe fines base index. US-based investment bank Jefferies has been anticipating a more conservative 2019 blast furnace premium of $60/t. For 2018, Atlantic blast furnace pellet premiums have been at $58-59/t to the reference 62pc Fe fines index.

The Asia-Pacific market has been hit by price cuts, with Indian pellet prices to China softening lately.

But the company sees recent price drops in the ferrous market as fairly short term. It expects prices for 62pc Fe fines to remain in a $60-80/dry metric tonne (dmt) range, as they have done in the past year. The Argus ICX 62pc seaborne fines price stood at $68.40/dmt cfr Qingdao today.

Vale expects premiums for its Brazilian Blend Fines (BRBF) to remain at $4-5/t next year, and sees 2019 premiums for its Carajas iron ore as roughly an average of 2017's premium of $17/t and 2018's premium of $21/t.

Pellet demand to climb further

As the steel industry's "flight to quality" continues, Vale expects global pellet demand to reach 602mn t by 2025, up from 514mn t this year and a 33pc increase from 452mn t in 2014-17.

The company continues to increase the share of high quality ore in its portfolio and lift pellet output to take advantage of this demand growth.

In 2013, it had installed pellet production capacity of 44mn t/yr. The restart of its idled Tubarao plants has lifted the total by 14mn t/yr, while the recent restart of the Sao Luis plant brings back a further 8mn t/yr of capacity. In total, Vale expects to have pellet production capacity of 65mn t/yr in 2020.

Global concentrate shortage could double

But Poppinga delivered some stark warnings on the global shortage of iron ore concentrate, noting that it is relatively easy to build a pellet plant but difficult to secure enough of the right quality feedstock.

"The big question would be where will all this feed come from," he said, estimating a global shortage of 25mn t in 2018. "I wouldn't be surprised if this figure doubles in the next years," he added.

Vale itself benefits from the ability to generate pellet feed in the Southeastern System, where it aims to produce 2mn t/yr of high-grade, low alumina concentrate in 2020 before ramping up to 20mn t/yr in the long term.

The wider seaborne concentrate market is expected to become less tight with the imminent restart of Anglo American's Minas Rio project in Brazil, and some additional restarts such as Sweden's Kaunis in July and Tacora's Canada-based Scully mine in mid-2019. But the pace at which global pellet demand is growing means concerns over concentrate supply are expected to persist.