Atlantic Basin iron ore contract blast furnace pellet premiums have fallen slightly for July, the first price drop this year.
The current high proportion of premiums to base iron ore fines prices -- which had fallen to recently test lows -- found buyers wanting to cut premiums longer term. Premiums account for around half the total FOB price of pellets, after iron ore base prices fell since March.
Buyers are contemplating using use more sinter, lump and lower grade pellets in place of contract low silica premium pellets to cut costs.
Further, greater pellet supplies at a time of weakening steel mill output -- with German and Dutch blast furnace activity declining in May year-on-year -- and an earlier gloomier outlook for immediate steel orders, may have taken their toll on spot and contract suppliers.
S&P Global Platts on Monday assessed estimated Atlantic monthly contract blast furnace pellet premiums at $44/dmt for July, down $1 from June.
The Platts assessment for monthly provisional contract settlement prices in July fell 5.97 cents/dmtu to $1.3931/dry mt unit, normalized to 65% Fe pellets, from $1.4528/dmtu FOB Tubarao for June.
The Platts Atlantic blast furnace pellet assessment reflects the premium charged for 65% Fe pellet with silica specified at 3%; alumina 0.5%; CCS 275; LTD plus 6.3 millimeters, 80; sizing over 9 mm greater than 94%; and sizing below 6.3 mm smaller than 2.5%.
The Platts assessed pellet price takes into account Platts' IODEX 62% Fe iron ore fines prices on a monthly average netback to Brazil for the previous month as its pricing basis. It uses Platts' spot Capesize freight rates between Brazil and China for the same assessment.
The pellet price is adjusted for quality to 65% Fe by adding to IODEX a multiple of the 1% Fe differential monthly average, also for the previous month.
LITTLE CHANGE
Platts' 1% Fe differential between 60%-63.5% Fe grades fell to $1.033/dmt for June, from $1.119/dmt in May.
New contract pricing involving Swedish miner LKAB, which typically offers fiscal-year terms through end-March 2018, may have broadly tracked pricing in earlier industry accords. Offering differing pricing structures around index selection to customers within pellet segments was also complicating comparisons.
Usage of 65% Fe indices, moving terms away from IODEX 62% Fe fines, may see a need to reduce fixed price premiums owing to the current large price gap between the two indices. The risk is the gap between the indices may narrow and overall realizations may drop using a long-term fixed premium.
In June, the gap between IODEX and 65% Fe averaged at $15.17/dmt, or equivalent to over a quarter of the IODEX monthly average.
A supplier noted that with the pellet premium recently rising sharply in China, this set the tone in terms of demand and supply in the wider pellets market.
"There's little reason not to be close to the Vale numbers, the market has not changed as much," he said, referring to Vale's premium settlements.
Concentrate prices have also recovered realizations in spot sales to China, while still able to command values closer to parity to 65% fines indexes, he added.
BHP Billiton's admission its Samarco JV would unlikely resume pellet output in 2017, after earlier expectations of a restart in the second half of the year, may not have been enough to tighten global supply expectations further at a time of lower base fines prices.
A buyer said recent pellet pricing dynamics were weaker than when prior annual and longer term deals were signed.
SPOT PREMIUMS
The "perfect time" for suppliers was seen in deals snagged around November 2016, he said, when global demand was high and a scramble for sufficient supplies kept bids on edge.
Iron ore buyers in regional FOB-based loading transactions, utilizing freight formulas to adjust China CFR iron ore fines benchmarks to reference prices in Brazil, were paying more under formulas than spot rates in the past four straight months.
Spot Brazil to China Capesize rates in June offered lower FOB Brazil netback iron ore prices on average than under the formula.
A formula adopted by Vale and the wider industry using a fixed freight rate and bunker oil adjustment factor averaged around $11.42/wet mt in June, from $11.60/wmt in May, according to Platts calculations.
The spot Tubarao to Qingdao Capesize rate averaged $12.512/mt in June, $14.09/mt in May, $14.37/mt in April and $15.19/mt in March.
Different moisture adjustment rates govern how the final netback is used for sales of fines, concentrates, and pellets.
Platts assessed July DR pellet premiums at $53/dmt, based on 67.5% Fe grade with the premium applied to a 65% Fe base. This was $1.50/dmt lower than in June.
While spot demand into the Middle East and North Africa for DR- and BF-grade pellets into DRI units was described as remaining firm, pricing into long-term contracts extending to a year may rely on longer-term trends and offtake performance. This may be creating a gap between the two markets.
Premiums are higher in spot volume available to meet surplus demand outside longer-term commitments.
Platts Black Sea pig iron prices in June remained relatively high at $331/mt FOB, compared to $348.13/mt FOB in May. A strong run of pig iron pricing has been seen since March.
Scrap to Turkey has ranged in a $260-$285/mt CFR band since November, after a weak spell in summer 2016. DRI and hot-briquetted iron track pig iron prices as metallic feedstocks.
