Iron ore pellet premiums for 2018 remain to be settled for many buyers, and negotiations with suppliers, including Vale, are yet to conclude, several purchasing and mining executives said Tuesday.
Volumes across various producers and grades are yet to close after biggest miner Vale opened talks for 2018 seeking around $15/dry mt more than blast furnace premiums for 2017, according to sources.
"Negotiations on pellets with Vale and other suppliers for 2018 are still ongoing," said one European executive.
Freight netback calculations and other terms are still under discussion and have yet to be agreed, he added.
Vale said Friday it secured $58/dmt in blast furnace premiums, in business the Rio de Janeiro-based company said had widely settled. This was described as a mix of six-month and annual pricing accords, in similar make up to agreements used this year.
Four steel mills, which are minority shareholders at pellet plants in Tubarao, are said to have settled with Vale. A direct reduction (DR) pellet settlement for 2018 volumes made first was followed by agreements in Asia, and then Europe for BF grade, Vale said Friday.
"I am very surprised, by the report on Friday," said a buyer in Europe. "On the producer side, everyone is now very bullish on this report."
Other pellet producers are said to be waiting for clarity around Vale's business, and may seek similar price levels around any reference established.
Contacted Tuesday for more details, a Vale representative said the company had no further comment beyond confirmation that it had settled with pellet plants' shareholders -- Japan's Nippon Steel & Sumitomo Metal Corp., South Korea's POSCO, Italy's Ilva and ArcelorMittal.
At the same time, several drivers for higher premiums have weakened. Spot pellet premiums in China, assessed by S&P Global Platts weekly, fell to $48.50/dmt on December 6 from $59.50/dmt on November 8.
And 65% Fe fines indexes, the difference over IODEX 62% Fe, fell to $16.45/dmt on Tuesday, from an average of $17.915/dmt in November, and October's $22.747/dmt.
Pellet producers like to check 65% Fe's performance over IODEX, as the basis for pellet invoicing is typically off a 62% Fe reference, and increases to the premium have been partly justified by 65% Fe's stronger performance since 2016.
The reported $58/dmt premium was described by some sources Tuesday as acting as a disturbance to ongoing negotiations, owing to the magnitude of the premium increase from a reference of around $45/dmt for 2017.
There is a need to further clarify any adoption and changes in supply with demand in the market, and assess the impact, buyers said.
Buyers in Europe see the blast furnace grade market as tight in first quarter of 2018, while there are expectations of additional pellet supply and weaker BF pellet demand later in the year, contrasting with Vale's views, sources said.
Vale is starting up three pellet plants in the first half of 2018 -- one in Sao Luis, and two in Tubarao -- with around 10 million mt/year of additional pellet capacity at full tilt.
SAMARCO
The Vale and BHP Billiton joint venture Samarco operation may come back by mid-2018, ING Bank said in a note, following reports Samarco had secured waste system permits. Samarco needs to still secure the main operation license and conclude the Corrective Operational Licensing for the Germano mining and beneficiation complex.
The rate of any resumption at the 30.5 million mt/year Samarco pellet complex after the fatal November 2015 collapse, and pellet quality owing to changes in beneficiation practices in Brazil and stricter environmental licensing, has the potential to make a major difference in future market balance, said a source.
Vale may focus its incremental volume toward DR-grade pellet, sources say.
Direct reduction iron (DRI) plants have been using BF pellets in significant ratios, of up to 40%, to help meet shortfalls in supply and lower costs. The gap between contract premiums in the two segments was $8-$10/dmt in 2017.
"There is currently still a wide gap between their views of fundamentals and premiums with ours," a European buyer said. "In fact, we already see the pellet market weakening compared to where it was four weeks ago. There is more flexibility in the market coming up."
Some pellet producers and buyers have signaled a willingness to move volumes around a portfolio with fixed and index-linked prices. Different pricing periods and opportunity for renegotiation are among the options.
Any short-term pricing option runs the risk of losing committed longer-term volumes, said a supplier. Any offer to be flexible on premiums and renegotiate later next year, without losing volume, would be taken up by a buyer, he added.
DR PELLET
The extent of a wider take up in Vale's settlement with a Persian Gulf DRI producer at $62/dmt for DR grade pellet had yet to be confirmed Tuesday. In Dubai last week at a regional steel markets summit, many DRI plant pellet buyers were said to be in talks with pellet producers and business was in the process of being negotiated, said sources.
Some show willingness to close terms, while others may not discuss details until next year, he said.
Vale's $58/dmt agreement in BF pellets, and a resultant $4/dmt gap with harder to produce DR grade, may lead to a higher price in later settlements for DR-grade, a miner said.
"For those that did not engage earlier, they may not get same number," he said of the $62/dmt premium. "There is a now a $58/dmt settlemet for BF in Asia, so DR may go higher."
CIS producer pellets are seeking to capture premium increases as they market material tailored for DRI application to Middle East and North Africa plants.
CIS pellets have targeted higher basicity, reducing silica and improve iron content and CCS, to become higher regarded and more widely included in buyers' portfolios after Vale's premium hikes over the past year.
Steel producer SSAB has a high reliance on pellets, which are procured from LKAB and Severstal under longer-term accords, sources say. SSAB may see a bigger effect on costs comparatively across Europe, as premiums rise over other iron products, an investment bank analyst said.
