Resurgent demand for iron ore pellet feed to drive wedge within high-grade market

Stronger buying appetite for pellet feed products among Chinese buyers has led to higher seaborne premiums since late July, with market participants expecting a wider price gap between high-grade pellet feed and high-grade sinter fines, sources told Fastmarkets on Friday August 25

Fastmarkets’ iron ore 67.5% Fe pellet feed premium cfr Qingdao index averaged $2.16 per tonne in the week ended Friday August 18, 9% higher compared to the trading week between July 31-August 4.

A Swedish-origin pellet feed cargo was sold in mid-August at the monthly average of a 65% Fe index at the month of the notice of readiness at the port of discharge, plus a premium of $4 per tonne, sources told Fastmarkets.

The cargo was traded on an October basis, equivalent to a premium of $2 per tonne on a September basis, according to a Singapore-based trader.

The traded premium was significantly higher compared with previous trades concluded earlier in the month.

A capesize pellet feed cargo of Chilean origin with a mid-July laycan was sold at the monthly average of a 65% Fe index at the month of the notice of readiness at the port of discharge, plus a premium of up to $1.50 per tonne in early August, sources said.

Stronger quarter 4 pellet feed demand

Market participants attributed tighter domestic supply, alongside an anticipated uptick in pellet feed consumption in the fourth quarter of 2023 for the resurgence in import demand from Chinese end users.

“Supplies of domestically mined pellet feed products have been tighter in the second half of 2023, mainly due to mining restrictions in northern China following various mining accidents in Shanxi,” a trader based in Shanghai said. “Mills in southern China with limited access to iron ore pellet feed have been more active in the seaborne spot market to procure additional cargoes.”

China produced a total 155 million tonnes of high-grade iron ore in the first seven months of 2023, up by 0.4% from the previous year, according to a local information provider.

The bulk of China’s domestically-produced iron ore is mainly used for sintering purposes, but access to domestically mined iron ore is limited to buyers in northern China, due to steep freight costs, a trader based in Beijing told Fastmarkets.

Pellet feed consumption is also expected to increase toward the fourth quarter, in line with annual government-imposed sintering restrictions on Chinese steelmakers, sources said.

An increase in demand for direct-charge material in the form of iron ore lumps and iron ore pellets is expected in response to the curtailment of sintering operations, according to a trader based in Hong Kong.

Sellers with cargoes due for arrival in the fourth quarter have been less willing to negotiate with buyers at existing premiums, in anticipation of higher prices in the coming weeks, a second Singapore-based trader told Fastmarkets.

“We are currently not holding discussions for our pellet feed cargoes arriving later on in the year because we believe that Chinese buyers will be incentivized to provide higher bids closer to October,” a third Singapore-based trader said.

Support from stronger pellet premiums

The rising import demand for pellet feed products was also supported by higher pellet prices.

Fastmarkets’ iron ore pellet premium over 65% Fe fines cfr China index was calculated at $16.50 per tonne on August 18, $3.50, or 27%, higher compared to the index published on August 4.

Despite the prospect of additional pellet supply from Iran in August following the removal of additional export tariffs announced earlier in the year, premiums have remained resilient in response to demand from Chinese steelmakers.

A pellet supplier source based in the Middle East told Fastmarkets that bids from Chinese end users for high-grade blast furnace pellets are between $18-20 per tonne, with a premium on a 65% Fe index basis.

“Demand for direct-charge material will continue to go up closer to the winter season, and prices of pellet feed products in both the domestic and seaborne market are likely to increase in response,” a Shandong-based trader said.

Sinter feed demand lagging

The improvement in demand for high-grade iron ore has however, not been uniform, with lower anticipated levels of consumption across Chinese steelmakers, alongside abundant supply in the seaborne market that weighed on prices of high-grade sinter feed cargoes.

“Portside volumes of Iron Ore Carajas (IOCJ) fines have remained at record-high levels for most part of the year, and increased shipment volumes from Brazil are expected toward the end of the year,” a fourth trader based in Singapore said. “Even the larger steelmakers in China are seeking means to offload their IOCJ cargoes in the third and fourth quarter by offering them at low prices in the seaborne market.”

Large, state-owned Chinese mills have been selling off surplus volumes of high-grade sinter fines in response to looming prospects of production caps on crude steel production.

While no official target has been announced by domestic authorities, market participants are expecting most steelmakers to reduce output levels following the peak season for steel sales in October.

Buying patterns of steelmakers are thus expected to shift toward sinter fines with lower iron content in both the seaborne and portside market close to the fourth quarter, at the expense of high-grade sinter cargoes.

Australian miner BHP has continued to narrow its monthly discounts for its low-Fe sinter feed cargoes for the month of September in response to strong portside sales, sixth-Singapore based source told Fastmarkets

“With steel mills offering 300,000 tonne cargoes of sinter feed in the seaborne market alongside existing offers from the miner, the seaborne market is essentially packed to the brim,” a Xiamen-based trader said. “Prices will likely buckle, especially when import demand diminishes in the coming months.”

Fastmarkets’ iron ore 65% Brazil-origin fines cfr Qingdao index averaged $118.06 per tonne in the trading week ended August 18, $8.88 per tonne, or 7%, lower than the average between July 24-28.

Sinter feed concentrates are currently tradable at discounts of $2-3 per tonne based on a 65% Fe basis, compared with pellet feed cargoes, which can command premiums of up to $3-4 per tonne, according to a second trader based in Shanghai.

“Apart from IOCJ fines, Canada-based concentrates and other Chile-based sinter feed have either been offered at discounts on a 65% Fe index basis, or at low premiums on a 62% Fe index basis,” a second Xiamen-based trader said, “Buyers will not be willing to pay higher costs while domestic alternatives remain more cost-effective.”

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