Atlantic iron ore pellet: Premiums jump for 3Q

Atlantic iron ore pellet premium settlements for the third quarter this year have risen sharply, despite a still bearish climate for steelmakers globally. Market participants had been anticipating an increase, but some were surprised by the extent of the rise.

Brazilian iron ore mining firm Vale "concluded its pellet premium definition process" for the third quarter of 2023 at a $60/dry metric tonne (dmt) premium to a 65pc Fe index, up by $15/t dmt from the second quarter for direct reduction (DR) pellets. The premium for blast furnace (BF) pellets was indicated by the producer at $52/dmt, up by $11/dmt on the quarter.

Wider output cuts are anticipated among European and north Asian mills in the face of low demand and falling prices, but weakness in seaborne iron ore fines indexes and consistently strong demand for DR pellets in the Middle East have been cited by market participants as the likely reasons for the sizeable increase in pellet premiums. The Argus ICX 62pc Fe fines index averaged $104.37/dmt cfr Qingdao in May, down from $125.75/dmt in February, when second-quarter premiums were settled. The Argus 65pc Fe fines index averaged $118.22/dmt cfr Qingdao in May, down from February's average of $140.24/dmt.

Demand has been stable in the EU pellet market, another Atlantic basin producer said. "Despite idling BF capacity in the EU, we see the lower demand is offset by less supply owing to suppliers' under-performance and reduced supply from the CIS. Hence we consider the seaborne pellets market still to remain rather tight," the producer said.

Vale's latest pellet premiums are not likely to be widely accepted in China, where 65pc Fe Iranian iron ore pellet is available at a $10/dmt premium to the 65 Fe index, Chinese traders said. Iranian exporters are looking to increase exports to China in the coming months as domestic steel production is expected to fall as a result of limitations on electricity supplies.

The differential between DR and BF pellet premiums has returned to what market participants consider a more conventional $8/dmt in the third quarter, widening from $4/dmt in the second quarter. Demand for DR pellets in the Middle East was constrained earlier this year by gas supply shortages, which have since eased. Natural gas prices that climbed to record-highs last summer have also fallen sharply, with the front-month Dutch TTF gas price at €26/MWh today, down from more than €300/MWh in late August.

The true steel demand picture will be the ultimate driver of market acceptance of the higher pellet premiums for the third quarter, one North American producer said. "We might see a divergence with steel industries in various parts of the world moving at different paces," he added. Other market participants are also unsure if buyers are prepared for the jump in premiums. "We've had several complaints from customers in Europe," one trader in the region said.

A number of blast furnaces across Europe have been scheduled to come back on line in the second and third quarters, but the weak market has prompted some steelmakers to consider further closures or reductions in utilisation rates. Chinese crude steel output in January-April rose by 4.1pc on the year to 354.4mn t, but April production was 1.5pc lower than a year earlier at 92.6mn t. Crude steel output is expected to have fallen in May, with output by China Iron and Steel Association member mills of 2.246mn t/d for 11-20 May down by 0.2pc from 1-10 May owing to weaker demand and falling steel prices.