Direct feed premiums are expected to defy expectations of a typical season lull in March, with market participants expecting continued strength throughout the month.
The Platts 65% and 64% pellet premiums to the forward 62% index basis were assessed at $51.05/dmt and $35.55/dmt respectively March 3, with the spot lump premium assessed at $0.45/dmtu.
In comparison, the 65% and 64% pellet premiums were assessed at $29.70/dmt and $26.75/dmt on March 4, 2020, with the spot lump premium at $0.305/dmtu the day before.
Although the end of winter in China typically marks the start of a bearish period for direct feed premiums, market sources said several factors were currently pointing to sustained support for both pellet and lump premiums into the second quarter.
Among the key differences this year was the underlying price for iron ore fines — the 62% Platts IODEX was assessed at $177.45/dmt CFR China March 3, at almost twice the price a year earlier at $90.95/dmt.
Market sources pointed to overall strong demand for iron ore, supported by high steel production levels on expectations of attractive steel margins, in comparison with early 2020 iron ore prices, supported by tightening supply.
Several end-users said that at the current level for iron ore fines, the theoretical value-in-use for pellet utilization was far more attractive than sinter feed fines, taking into account continued high price levels for domestic coke.
While blast furnace operation limitations would mean a sustained heavy reliance on sinter feed, end-users were keen to maximize available spare capacity for direct feed utilization to improve production efficiency.
Sintering restrictions and production cuts in Hebei province are considerably more severe than in the previous year, and were seen to incentivize the utilization of direct feed materials for steel production given relatively attractive steel margins. In comparison, end-users held off increasing their direct feed utilization in early 2020 amid low steel margins and relatively relaxed environmental controls.
Construction boost
Although the end of winter usually correlates with an easing of environmental restrictions, market sources said the restart of large-scale construction projects would continue to fuel steel prices and drive steel production efficiency.
On the supply side, another jarring difference to previous years was the continued high take-up rate of high grade pellet supply from Brazil, Europe and other Atlantic producers this year.
The restarting of Atlantic steel production capacity from the third quarter of 2020 has been sustained into 2021, with the typical high reliance on pellets for steel production raw materials leading to high consumption volumes from term contracts.
As such, spot supply of high grade pellets into China has been largely non-existent since late 2020, with producers often opting to push any excess pellet volumes into existing term contracts rather than the spot market.
The lack of high grade pellet supply away from the Chinese portside market has led to a shift in demand toward Indian pellets, with buyers willing to pay higher premiums for the few varieties of Indian low alumina pellet.
While the low alumina Indian pellets available for export typically have higher alumina levels than their Atlantic high grade counterparts, Chinese end-users view them as a more sustainable supply due to the certainty of available spot cargoes. This was further supported when no export tariffs were imposed on Indian pellet exports in February, as some in the market had been fearing.
A lack of spot lump cargoes was also observed, with end-users without access to the portside market willing to pay high floating premiums to secure available seaborne cargoes.
Market sources also pointed to the lack of term contract offers from end-users, fueling expectations of higher portside prices for lump.
In previous periods of high availability of lump, it was not uncommon for Chinese end-users to resell their contracted seaborne lump cargoes and cover their own requirements at lower prices from the portside market. Increased demand from North Asian end-users was also expected to further tighten available supply through a higher take-up rate of lump volumes on a term contract basis, or even through the procurement of lump cargoes from certain Chinese ports.
While some market participants saw limited upside for lump premiums in light of its higher coke consumption rate compared to pellet, there were those who expected coke prices to weaken into Q2, improving the cost-efficiency of lump utilization.
Several traders also expected lump premiums to be buoyed by continued strong pellet demand, pointing to the degree of substitutability between the two products.
