Vale to switch pellet pricing to 65% Fe iron ore index

Iron ore producer Vale will use a 65% Fe iron ore index to price its pellets next year, moving away from using a 62% Fe iron ore index as the base price for such cargoes, executive director Peter Poppinga said this week.

Speaking at the company’s investor day at the New York Stock Exchange on Tuesday December 4, Poppinga said the decision made sense as the 65% Fe iron ore and pellet [prices] were linked to steel mill productivity and “by switching [our pellet pricing] to 65% Fe iron ore index there will be a natural hedge for blast furnace [operators] to tackle [their] productivity needs”.

Fastmarkets MB’s 65% Fe iron ore index stood at $83.40 per tonne cfr China on Tuesday December 5, up from $83 per tonne from the previous day.
High-grade iron ore prices stayed above $90 per tonne from around end of June to end of November but have retreated below that level since amid narrowing mills’ margins.

Fastmarkets MB’s 62% Fe iron ore index stood at $67.38 per tonne cfr China on Tuesday, up from $67.16 per tonne the previous day.

Fastmarkets MB’s implied pellet premium over the average of the weekly 62% Fe iron ore index, which is updated every Friday, stood at $53.79 per tonne on Friday November 30.

The executive director said Vale’s 2019 discussions for ‘tier-one’ pellet were almost done and there will be a “rise in prices, not a premium increase”.
Historically, Vale has priced its annual pellet contracts by negotiating the premiums over the 62% Fe iron ore index with its customers.

The senior executive highlighted that pellet demand had seen a “dramatic rise” worldwide, especially in the Middle East and Africa, with China emerging as the new element on the consumption side.

The rise in demand was partly a function of depletion in domestic iron ore concentrates around the world, he added.

“Vale estimates there will be a shortage of 25 million tonnes of pellet feed in 2018 and won’t be surprised if this figure doubles over the next years,” he added.

Iron ore pellets are agglomerated balls of concentrates or pellet feed that are made through the pelletizing process.

Pellet premiums over the 62% Fe iron ore index surged sharply this year, amid restrictions in China on pelletizing operations given the country’s focus on environmental protection and tight seaborne supply.

However, demand for pellets from China and other regions has remained strong.

Poppinga said that while Vale does not expect to see iron ore pellet prices coming down soon, the market will react when it resumes operations at its Samarco joint venture in Minas Gerais. The pellet-making operations have been halted since the collapse of the Fundão tailing dam in November 2015.

Samarco is a 50:50 joint venture with BHP and has a capacity of 30.5 million tonnes.

On December 3, the Singapore Exchange (SGX) launched a high-grade iron ore derivatives contract settled against Fastmarkets’ daily MB 65% Fe Iron Ore Index, in response to calls from market participants for efficient risk-management tools to manage their exposure to this segment of the steelmaking raw materials market.

Poppinga had lauded the launch of the contract by SGX at the event on Tuesday, saying it will provide the market with a forward curve and give customers the ability to hedge.

The contract saw strong interest from the market on the launch day, with trades done on all successive days since. 

Steel raw materials editor Deepali Sharma and index manager Peter Hannah will be discussing the new SGX 65% Fe derivative contract in a live webinar on December 11. They will examine how changes in the iron ore market have prompted the need for this high-grade derivative, the opportunities the contract offers and the methodology behind our iron ore index. Register here for Fastmarkets MB’s SGX 65% Fe derivative contract webinar.