DR PELLET: Shortages to persist in 2019, with no material for spot trade

It is unlikely that there will be any spot-market activity in 2019 for direct-reduction (DR) grade iron ore pellets, according to Saudi Arabian steelmaker Rajhi Steel.

“From a short-term perspective, we do not expect that the DR pellet spot market will appear, unless some buyers cancel long-term agreements unexpectedly,” Saad Thani Alruily, the company’s supply chain manager, told Fastmarkets on Thursday November 8.

Fastmarkets estimated that the total volume of DR pellet traded in 2018 will be around 40 million tonnes, while market sources said that the spot market was almost non-existent.

Researchers at Fastmarkets have estimated the global output of DR pellet in 2017 at around 35 million tonnes.

Vale, the world’s largest supplier of DR pellet, has sold nothing on the spot market in 2018, with all its tonnages this year under contract, Alruily said.

“Spot shipments may appear gradually only after Samarco comes back to full operation,” he added.

Brazilian iron ore pellet producer Samarco, which is owned 50:50 by Vale and BHP, has postponed the restart of its operations to early 2020. It had earlier planned to restart output at the beginning of 2019.

Samarco has production capacity for 30.50 million tonnes per year of pellets. But according to a plan drafted last year, the company will restart at only two-thirds of capacity.

It shut down its pellet plant in November 2015 following the collapse of its Fundão tailings dam. The loss of this output was the reason for the rapid decline of DR pellet supplies and the disappearance of the spot market.

The majority of annual contracts for DR pellets for 2018 were settled at $62 per dry metric tonne (dmt), although some deals were heard at $64 per dmt.

Fastmarkets’ monthly assessment of the DR-grade pellet premium was $73 per dmt on October 31 due to the shortage in the market. This was up from $69 per dmt on September 28.

Fastmarkets’ 62% Fe iron ore index was $76.27 per tonne cfr Qingdao on November 8, up from $75.27 per tonne the day before.

In 2017, the average value of the 62% Fe iron ore index was $71.39 per tonne. In 2018 up to November 8, the average has fallen to $69.58 per tonne.

“The DR pellet market will suffer from shortages at least in the short term, even with the restart of Vale’s pelletizing plants,” Alruily told Fastmarkets. “[Swedish producer] LKAB still has limited capacity, and no additional capacity is expected in the near future.”

Vale restarted its Tubarão II pelletizing plant in January, while Tubarão I resumed operations in May. Those events were expected to add 3.80 million tonnes of DR-grade pellets to supply volumes this year.

Demand for high-quality iron ore pellets is likely to be supported by steel mills’ attempts to reduce their emissions levels, according to Humberto Oliveira, Vale’s head of technical marketing for the DR sector.

Sweden’s LKAB closed its Svappavaara pellet plant for maintenance late in the third quarter of the year and will keep it idle at least until the end of January 2019.

As well as maintenance stoppages, LKAB’s pellet plant has been stopped twice since late July, first because of a fatal accident and then after a fire on the railway line taking its output to port.

But while supplies were restricted, demand for DR pellet has increased globally.

From January to September this year, global output of direct-reduced iron (DRI) went up by 12% to 62,526 million tonnes, compared with 55,677 million tonnes over the same period last year, according to recent statistics published by the World Steel Association (Worldsteel).

The most rapid growth was in the Middle East-North Africa (Mena) region, where DRI production rose by 5.4 million tonnes in January-September year-on-year.

DRI output in the region was 32 million tonnes over the first nine months of the year, compared with 26.7 million tonnes in January-September 2017.

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