Pressures amplify EU scrutiny of CIS, Indian pellets

European steelmakers are increasingly scrutinising CIS and Indian pellet prices despite limited spot trade and quality variations, as continuing cost pressures and a year of fraught negotiations over Brazilian term supply contracts encourage them to seek price signals from typically more marginal parts of the seaborne market.

One European market participant likened the current environment to the evolution of the iron ore fines market 10 years ago — just before the widespread adoption of indexes in contracts — with a year of choppy market conditions having jolted the traditional structure of fixed-price long-term contracts. Higher price risk, uncertain market conditions and a gradual lean toward some shorter-term pellet supply contracts are boosting demand for more spot price reference points.

But the Atlantic pellet market has no easy reference points owing to the scarcity of regional spot trade, particularly where the most mainstream Brazilian and Swedish grades are concerned. Instead, Europeans have been paying closer attention to CIS and Indian spot trading activity — problematic because of quality variations and the Indian market's high exposure to Asian market dynamics, but at least providing solid data points on a fairly regular basis, albeit spot liquidity is still limited.

European mills are expected to negotiate in earnest once 2020 contract negotiations get under way, bruised from a year of high costs and flagging steel prices, and anticipating another challenging year. European flat steel prices have risen in the past three weeks, with mills hiking offers and reluctant to give any discounts now that steel production cuts are taking effect. But underlying demand remains low, suggesting that any market upside should still be viewed with caution. The Argus daily northwest Europe assessment for hot rolled coil (HRC) was at €427.25/t ex-works yesterday, up from a 2019 low of €412.25/t in mid-November.

EU boosts intake of CIS pellets

CIS pellet exporters have been pushing hard to shift tonnes this year, with plentiful spot offers to Europe and other markets — arguably contributing to an oversupplied Atlantic market in 2019, particularly for blast furnace grade, market participants said. Their efforts have been paying off, with multiple sources confirming an increase in European usage of CIS pellets this year as they sought to cut back on some of their higher-cost Brazilian and Swedish pellet supply.

Major Russian supplier Metalloinvest produced 21.2mn t of pellets in January-September, up from 20.7mn t a year earlier — in part also catering to domestic demand, which has crept up this year, market participants said. Russian steel association Russtal this week lifted its forecast for Russia's 2019 steel consumption to 42.6mn t, which would mark a 4pc year-on-year increase, up from the 2pc increase that Russtal forecast in July.

European mills are typically reluctant to adjust their highly-structured feedstock intake, but this year's severe cost pressures have necessitated some adjustments.

Ukraine's Ferrexpo last month signed its first long-term pellet supply contract with German steelmaker Thyssenkrupp — a logical move for a pellet producer seeking new sales opportunities after this year's drop in global consumption, and a strong indication that European mills are now taking a more flexible approach to pellet sourcing and are open to deviating slightly from their status quo when it comes to specifications.

Meanwhile, months of flagging regional steel demand has left some CIS companies looking to offload excess iron ore — albeit not necessarily pellets. One Ukrainian steelmaker told Argus it recently started exporting iron ore to China for the first time, finding it more economical to sell the iron ore rather than process it and sell the resulting semi-finished steel products.

Indian pellets still on the radar despite halt in bookings

European spot bookings of Indian pellets ground to a halt in the second quarter as steel market conditions worsened, but they remain a key discussion point and EU mills are still analysing Indian pellet prices closely.

Some mills are said to be carrying out tests to see whether they would hypothetically be able to start using Indian pellet grades. "At the moment we are not taking any steps to buy Indian pellets. But we want to know what our options are, especially if conditions are going to remain difficult for some time," a source close to one such initiative told Argus.

The application of Indian pellet indexes to European bookings of any grade can be problematic, in part because of quality variations but also because Indian spot pellet prices are driven by the Chinese market, which has lately been faring better than Europe. The Argus weekly cfr Qingdao index for Indian pellets with 64pc Fe and 2pc alumina was last assessed on 3 December at $112/dmt, up from $106/dmt on 12 November in part because Chinese mills' profit margins have widened enough for them to buy more high-grade iron ore products such as pellets — a recovery that is yet to emerge in Europe.

But in the absence of a credible Atlantic pellet index that would provide a "perfect fit" to the region, some Europeans are taking a more open approach to adapting other reference points, with Indian and CIS pellets providing increasingly valued price signals to the wider seaborne market.

By Ellie Saklatvala