Iron ore lump prices overtake pellet in China

Seaborne lump prices have climbed above Indian pellet prices into China, driven by tighter supply of lump and high alumina penalties for Indian pellet that are limiting its use in iron ore burdens.

Maintenance outages are reducing supplies of Australian mining firm Rio Tinto's PB lump and PB fines for July and August, pushing lump prices higher.

The Argus 62pc Fe lump price rose to a five-year high of $150.80/dmt cfr Qingdao yesterday. Seaborne lump prices into China are based on the lump premium to the underlying 62pc Fe fines index. The Argus 62pc Fe lump premium to the Argus ICX 62pc fines index was assessed at 41.30¢/dmtu on 3 July, just short of the five-year high of 42.29¢/dmtu premium in 2017.

By comparison, the 64pc Fe, 3pc alumina Indian pellet was assessed at $138/dmt cfr Qingdao on 2 July. It has been priced lower than lump since 11 June.

Most of China's 1bn t/yr iron ore imports are iron ore fines that require sintering before use in a blast furnace. Increased restrictions on sintering machines, a major source of pollution in north China, have raised demand for direct-charge products such as iron ore lump and pellet, which can be directly added to a blast furnace.

Tighter supply of iron ore lump at ports has helped to raise lump prices at a faster rate, while imported pellet stocks in portside markets are still quite high at around 5mn-6mn t.

The proportion of pellet used in blast furnaces is limited by technology and many mills can use only 5-10pc pellet in their iron ore burdens. This is why some mills are forced to buy lump, although imported Indian pellet is cheaper, a Shanghai-based trader said.

Lump prices continue to rise

Using domestic iron ore pellet is more economical than imported pellet, which is also weighing on seaborne pellet prices.

China's increased production of domestic iron ore may ease some of the upward pressure on pellet prices. The rise in seaborne iron ore prices to above $100/dmt has encouraged more domestic production, bringing more Chinese supply back to the market.

Much of China's ore reserves are low-grade iron ore, and pelletising plants are stepping up their use of domestic pellet feed concentrate to make pellet because of its lower cost and alumina content compared with Indian pellet.

Domestic pellet is priced at Yn1,100/dmt ex-mine, including value-added tax (VAT), in Qianan. The capacity of domestic mines is now limited because of emissions-related restrictions on mining.

Most of the pellet in the Chinese market is from India, while Australian mines are the major suppliers of medium- and low-grade lump.

Lump also has lower alumina content, which is why mills prefer it over Indian pellet. PB lump has 1.4pc alumina content, while most Indian pellet have 2.5-3pc alumina content. India's state-controlled KIOCL and private-sector Godaveri are the only two suppliers of pellet with 2pc or lower alumina content in the export market.

Supply of low-alumina pellets has fallen since the US re-imposed sanctions on Iran, as inflows of Iranian pellet with 0.75pc alumina have been curbed.

Low-alumina pellet cargoes were being offered at around the same price as Newman blended lump at Shandong ports this week at around Yn1,100/wmt. Ukrainian pellet was offered at Yn1,050/dmt at the port.

Falling met coke prices in the Chinese market is likely to support lump prices, since these prices are often inversely proportional to met coke prices. There is talk in the market that Tangshan-based coke suppliers may further reduce met coke prices, which will continue to support lump prices.

Buying may shift to pellet

A few buyers think the rise in lump prices has been too sharp, according to a Hebei-based trader. "This may motivate mills to use more pellet. We have received enquiries from mills for pellet this week," the trader said.

Replacing a tonne of lump with pellet can save mills about Yn200-300/t at current prices, making it unlikely for lump prices to have much more upside as mills' profit margins have started to slide again on slow demand, said the manager of a Hebei-based mill, which plans to use more domestic pellet.

China imported pellet vs lump prices $/t