Higher iron ore pellet premiums needed to ensure seaborne availability: consultant

London — Iron ore pellet premiums will need to rise above current levels of around $60/mt to attract pellets from domestic to seaborne markets to meet demand, a leading iron ore consultant said this week.

The current tightness in pellets markets – stemming largely from a shortfall from Brazil following tailing dams accidents – may continue for another two years, according to Sao Paulo-based Jose Carlos Martins, senior partner, Neelix Consulting Mining & Metals.

Domestic pellets demand is growing in Brazil, the biggest pellets producer, where more than 50% of the country's capacity is currently idle, Martins said in an emailed interview with S&P Global Platts.

"With 50 million tons pellet capacity idle in Brazil, the situation is only not worse because high prices brought back to market significant volumes of domestic concentrates from China and Eastern Europe pellets and pellet feed (with material from Ukraine and Russia as well as Canada and USA)," Martins said.

"I do not believe this situation will change for the better in the next two years, depending on Vale's and Samarco's performance."

However, looking three to five years into the future, additional supplies of high-quality pellet feed could come from Western Africa if the existing projects in the region move ahead as planned, the consultant noted.

Projects are slated for Guinea (SMB-Winning's Simandou), Cameroon and Congo Brazzaville (Sundance Resources), as well as a resumption of SL Mining, a Gerald Group subsidiary in Sierra Leone, that could provide new supplies of high-grade ore. However, these projects are either still in the feasibility stage or restricted by resource nationalism.

Surging fines prices

Seaborne pellet premiums were this week squeezed by the surge in fines prices.

S&P Global Platts assessed the spot blast furnace pellet premium to the 62% Fe Iron Ore Index assessment at $59.45/dry mt CFR North China on April 21, down 85 cents from April 14, after adjusting to a 65% Fe basis.

The 64% Fe blast furnace pellet was assessed at $226/dmt CFR North China up $14/dmt on week. The premium was assessed at $39.20/dmt CFR North China, down $1/dmt on week.

Bidding levels on a fixed price basis for Indian pellet cargoes jumped as Platts' 62% Fe Iron Ore Index increased by $13.10/dmt on the week to $185.75/dmt on April 21, close to a 10-year high.

Global production

Global pellets production is around 420 million mt/year, mainly produced and consumed domestically in China, Russia, Ukraine, US, Canada, Mexico, India and Iran, Martins noted.

The seaborne pellets market is around 120 million mt/year, depending fundamentally on supplies from Brazil, with 90 million mt/year capacity, and Sweden with 20 million mt/year capacity. The rest is supplied by production excess to domestic needs in the former Soviet Union, North America and India, Martins said.

Pellets production in Brazil has slumped in recent years following tailings dams bursts at pellet producer Samarco (a BHP-Vale joint venture) in November 2015 and Vale's Brumadinho mine site in January 2019, after which mining was curtailed at some locations producing pellet feed.

Over the same period, demand for pellets and higher-grade ore has increased worldwide. These products, with a higher iron content, can reduce the amount of coal needed in blast furnaces during the steelmaking process, reducing carbon emissions.

Weak Q1 output

Vale's pellet production dropped by 9.2% on year to 6.3 million mt in Q1, "as a result of lower pellet feed availability from Vale's sites mainly from Itabira and Brucutu," Vale said in its latest quarterly production report. The company expects to gradually increase production during 2021 with the higher availability of pellet feed from Timbopeba and Vargem Grande, it said.

The Q1 pellets output was "significantly weaker than (the market) expected" said analysts at Jefferies Equity Research in an April 20 note.

Vale produced around 42 million mt of pellets in 2019 and just 30 million mt in 2020.

Samarco is returning to the market with 25% of its 30 million mt pelletizing capacity but Vale remains with almost half of its 60 million mt capacity idled, Martins noted.

"For this year, considering some southern system mines returning to operation under dry stacking system (no tailings dam) at least 5 million ton additional production would be expected for Vale and 8 million tons for Samarco," the consultant said. "With the market recovery in America, Europe and Middle East, this additional volume will be outnumbered by increased demand."

In Brazil, idle blast furnaces, aging sinter plants and lack of local lump ore are increasing domestic demand for pellets and reducing pellets available for export.

In addition, qualities being produced in Brazil are lower nowadays due to less efficient concentration processes used and continuing production constraints at the main high-quality pellet feed mines of Brucutu and Itabira.

The direct reduction pellets market is suffering more than the blast furnace pellets market from this quality deterioration, the consultant said.

Use of Carajas Fines

The situation is unlikely to improve unless Brucutu and Itabira mines come back at full capacity and more high-grade Iron Ore Carajás Fines (IOCJ) from Vale's northern system is transformed into pellet feed to supply pellet plants in the southern system, according to Martins.

"Although possible, this alternative brings additional cost and hampers port capacity," the consultant said. "The situation in the pellets market is really complicated. The current Brazilian production problems are potentially greatly disruptive."