Europe Q3 iron ore pellet premiums may rise on $36

Europe Q3 iron ore pellet premiums may rise on $36/dmt offer in tighter market

London (Platts)--28Jun2013/904 am EDT/1304 GMT

Production cuts at iron ore pellet plants in Brazil and Canada alongside demand in Europe for better productivity at the blast furnaces still operating have helped tighten the market and lead to price increases, industry sources said.

Pellet premiums in Europe for the third quarter of 2013 may rise by $6-8/dry mt compared to pricing agreed for Q2 in a range of just below $28 to low-$30s/dmt, based on offers heard around $36/dmt from regional buyers.

This is based on offers for Vale products, with Samarco and Swedish supplier LKAB said to be referencing similar premiums for a portion of contracts.

European quarterly pellet premium settlements are not expected to be finalized until mid- to end-July, according to a large buyer.

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In Japan, a $28/dmt reference has been agreed for the fiscal year started in April with Vale, and some other steelmakers have also achieved similar long-term fixed price agreements.

Vale's decision announced in October to idle pellet plants in Tubarao, alongside Cliffs's later closure of its Quebec facility owing to poorer global demand for blast furnace pellet, has taken out capacity.

In addition, LKAB reduced output earlier this year due to operational problems in the Kiruna and Svappavaara pelletizing plants over Q1, which was cited by several European buyers as contributory factor to the later prices increases. LKAB reported operations returning fully back to capacity.

Middle East and US market growth potential for direct-reduction pellet, which is a higher-grade product, left European steelmakers seeking the best quality blast furnace pellets in stronger competition for remaining supply.

Vale, which is also in the joint venture Samarco operation with BHP Billiton, has contended with degrading iron ore content and higher impurities from locally mined ore, reducing efficiencies.

A steelmaker that uses a wide variety of pellets from Russia, Ukraine and Sweden as well as Brazil and Canada acknowledged rising prices in the Atlantic Basin for those exposed to, or still willing to utilize, better quality pellets.

CIS region pellets -- said to be offered based around premiums more closely reflecting spot levels sold into China -- were now being maximized in supply contracts by this buyer. Brazilian pellets will not be sourced in Q3 by the mill.

The executive is more concerned about the price paid for Fe content in the pellet at a time of weaker steel pricing and focus on cutting cost, rather than paying up for Brazilian or Canadian material with slightly lower impurities or better sizing consistency and compression strength.

DEMAND IS UP

A producer stressed that pellet demand is up "everywhere," based partly on DRI increases in Middle East but also on general strong demand, especially in Europe.

While steel demand from the region is weaker on economic concerns and reduced state-led investment for steel-intensive projects, producers have idled blast furnaces but the remaining units are being run harder to achieve efficiencies. Pellet demand, along with PCI, has been reported as strong.

A common concern from buyers is that pellet premiums alone may not be as relevant in determining changes over periods, or comparing prices achieved, due to different contract mechanisms.

The Platts IODEX is used to calculate the underlying iron ore fines price, with the CFR assessment netted back to Brazil in the case of Vale and sales usually basis FOB Tubarao.

Depending on how the freight between Brazil and China and changing bunker fuel price is referenced, the net back from IODEX could range at $17-25/mt, said a source.

Contracts netting back at a higher freight rate to compute a lower FOB fines price may be charged a higher pellet premium to compensate. There is also the adjustment for Fe grade in the pellet up from the 62% Fe fines IODEX basis, and how that is included in the final invoice.

LKAB is said to have offered buyers two main pricing mechanisms. Customers can chose one or the other, and a mix of the two.

One model is a floating price referring IODEX, with a premium, indicated to be for a year. The other is a quarterly fixed flat price.

Buyers in Europe are looking at pellet premiums seen in spot deals in China as a growing reference in negotiation.

Spot CIS pellet sales were indicating premiums to fines adjusted for Fe of about $17 to low-$20s/dmt, several sources said.

One said a pricing system linked to cost of pelletization plus a small margin is preferable, as the market strength is already captured in the IODEX price and it does not want to be exposed to both the fines-related price risk and another based around pellet fundamentals.

DRI pellet is used more in the Middle East, the US and Southeast Asia, while most mills in Northeast Asia and Europe use mainly blast furnace pellet.

Vale idled production at its pelletization plants in Sao Luis and Tubarao from Q4 2012 due to contraction in pellet consumption. Vale said it reallocated output towards the supply of sinter feed, which has gained in favor with customers.

Vale produced a record-high 55.1 million mt of pellet in 2012, a 2.3% increase from 53.8 million mt the previous year, mainly due to a ramp up of its operations in Oman, which produce direct-reduction pellet. It targets to produce a fifth less, at 43 million mt in 2013, the company said late last year.

--Hector Forster, hector.forster@platts.com ; Annalisa Jefries, annalisa.jeffries@platts.com
--Edited by Maurice Geller, maurice.geller@platts.com