Steel and mining group ArcelorMittal said Wednesday it booked a derivatives loss for 2017, related to hedging a long-term agreement for iron ore pellets supplied to plants in the US.
ArcelorMittal said mark-to-market losses of around $300 million in 2017 are based on the value of derivatives relating to a pellet purchase agreement for the minimum pellet volumes to be purchased over the remaining nine-year life of the contract.
The group's NAFTA segment produced 23.48 million mt of steel in 2017, Luxembourg-based ArcelorMittal said in an earnings report.
ArcelorMittal USA and miner Cleveland-Cliffs signed in 2016 a pellet contract running through to 2026 for a minimum total 7 million long tons and maximum of 10 million lt for supplies to the Indiana Harbor West and East, as well as the Cleveland Works steel facilities.
"Effective October 31, 2016, the company entered into a pellet purchase agreement in the US including a special payment component that varies according to the price of steel in the US domestic market," ArcelorMittal said.
Terms were agreed on a "market-based pricing mechanism," understood to involve HRC steel pricing in the US domestic market, as well as iron ore seaborne references, using spot pricing assessments.
Benchmark iron ore prices used to settle derivatives contracts surged by 22% on average in 2017, from 2016, according to S&P Global Platts data. US HRC prices rose on average 17.5% in 2017 from 2016, according to Platts TSI indices.
Cliffs said on January 25 for 2018 US iron ore pellet pricing was expected to range at $97-$102/lt FOB basis, up from average US unit revenue of just over $88/lt in 2017.
"Recent ferrous raw material prices provided Cliffs with the opportunity to highlight its US Iron Ore leverage to these stronger markets, including Atlantic pellet premiums, domestic steel prices, and IODEX," said Ben Riley FBR analyst Lucas Pipes in a note January 26.
Cliffs stands to boost revenue, even with slightly lower pellet premiums over 2018 than Cliffs assumptions, which are $77/mt IODEX 62% Fe CFR China iron ore fines pricing, $675/st US HRC, and a $58/mt Atlantic blast furnace iron ore pellet premium, the US bank said.
Platts published January Atlantic estimated blast furnace contract pellet premiums at $58/mt, up from $45.50/mt assessed each month in Q4, 2017. ArcelorMittal mines and markets iron ore concentrate and pellets from resources in Canada, supplying its own plants and third parties. The company does not comment on the outlook for iron ore prices, it said.
