Atlantic pellet: Steel slump rattles 2019 talks

The recent slump in global steel prices is generating debate in the Atlantic iron ore pellet market, with a range of price points under discussion for 2019 contracts.

Initial talks are underway but settlements are yet to emerge, with a major Brazilian supplier widely expected to release its official offer levels next week. But market participants note premiums of $65-75/t under discussion for typical blast furnace (BF) pellet with 65pc Fe content. This would compare with 2018 contract BF premiums of $58-59/t. Pellet premiums are to the reference 62pc Fe fines index.

One Atlantic buyer is seeking a BF premium potentially below 2018 levels, but there may be surrounding circumstances factoring into the negotiations that would account for the lower price, a market participant said. No deal is said to have been reached on that basis.

For direct-reduced (DR) pellet premiums, Atlantic market participants are said to be discussing a potential $7-8/t increase on BF premiums, although in some cases a narrower spread of $5/t is cited.

This would signal a move back to a more traditional BF-DR premium spread in Atlantic, with 2018 contract DR premiums having stood just $4/t higher than BF premiums, at $62/t. Historically, Atlantic DR premiums have typically been around $8/t higher than BF premiums, if not slightly more.

A rise in Atlantic pellet premiums for 2019 was widely anticipated, but the extent of that rise was a subject of debate. Some market participants previously said that they expected to see DR premiums rise more sharply year on year than BF premiums, as global DR pellet supply is particularly tight, and those predictions may be proved correct based on the prices under discussion.

But downturns across the global steel market this month have complicated Atlantic pellet negotiations, with cracks starting to appear in a long-standing bullish outlook. Underlying high demand and tight supply continue to support pellet prices, but falling steel and iron ore prices are giving buyers grounds to push back against even steeper year on year hikes.

Recent signals have been instrumental in changing people's perspectives on pellet, a European market participant said, noting that the tone of discussions would have been different if they were taking place a month ago.

This week has seen another wave of price cuts across the steel market, with some Chinese hot-rolled coil (HRC) producers now barely breaking even on sales after months of strong profit margins. The Argus daily fob Black Sea assessment for HRC is $480/t today, while Argus last assessed US Midwest domestic HRC at $784/short ton ex-works — down by $30/t and $55/st, respectively, since 1 November.

Meanwhile, Indian pellet prices have slipped this month, hit by a drop in Chinese demand in the wake of less stringent environmental restrictions imposed on mills. The Argus ICX 62pc seaborne fines price is at $72/dry metric tonne (dmt) today, down from an eight-month high of $77.80/dmt on 9 November.

With these drops rattling 2019 Atlantic pellet negotiations, there could be a shift towards more short-term pricing periods — a development which was already under way, but which could now gain more traction. Some buyers might leave more tonnage to buy on a spot basis through the year.