Contract iron ore pellet premiums expected to fall in Q3: sources

Contract iron ore pellet premiums for blast furnace and direct reduction grades were expected to fall for the third quarter from record levels in Q2 as available steel margins against competing raw materials feedstocks narrow and steel producers slow ironmaking.

Lower ferrous scrap prices in Turkey and Europe, a weaker economic outlook, lower hot-rolled coil prices and concerns around global steel demand with production growth slowing down were dampening sentiment for Q3, according to market participants.

A pellet producer said a small fall in Q3 premium levels for blast furnace pellets would be expected on a deterioration in forward market steel market conditions and potential for lower output affecting consumption rates.

He saw no change to underlying fundamentals for Q2 which had seen strong demand in Europe from flat steel producers earlier chasing orders and making up for shortages in iron ore and coal.

The World Steel Association in April cut its steel demand growth expectation for advanced economies to 1.1% for 2022, from a 4.3% rate in October, according to the Brussels-based group's widely followed biannual Short Range Outlook.

Market participants may be waiting for Vale's premium setting process to finalize in coming weeks, especially with Asian and Middle Eastern participants.

As pellet suppliers such as Ferrexpo, Metalloinvest, Metinvest and Severstal continue to see sales and regular business ties affected by the Russian-Ukraine war, a large portion of seaborne supply and some demand continues to be affected.

Other producers Samarco, Rio Tinto, LKAB and Bahrain Steel typically negotiate pellet premiums bilaterally with clients across various regions and segments, with less business referencing Vale's blast furnace premiums as some markets and buyers settle basis different terms and finalize later.

Brazil's Vale has yet to announce any settlement levels for Q3, with the company said to be using a market clearing-based process to set its premiums, rather than an approach pushing through bilaterally negotiated settlements with its largest customers for broader agreement.

Vale said Feb. 25 its iron ore pellet premiums for the second quarter increased to $60.60/dry mt for blast furnace grade pellets from Tubarao, and $65.80/dmt for DR pellet premiums, both priced off 65%-Fe fines indexes.

Market talk around a number lower than Q2 premiums for new blast furnace premiums was unable to be confirmed as an actual or repeatable Q3 offer, or as an indication for where a settlement could be reached.

Ferrous scrap prices in Turkey and Europe started declining from April, as scrap declines outpaced lower steel prices in some markets. HRC prices in Europe have fallen sharply in May, while plate and slab prices have seen support, on longer-term investments tied to certain energy and infrastructure steel grades and reducing supplies in segments due to sanctions on Russian materials.

There has been changing trade flows and available re-rolling volumes in Europe since the invasion of Ukraine.

Pellet premiums are closely tracking the 62%-65% Fe iron ore fines spread, as business tied to 62%-Fe and 65%-Fe indexes use comparative data for terms typically negotiated every quarter.

A decrease in the 62%-65% Fe fines spread to $22.10/dmt on May 19, from an average $24.40/dmt in April, and average $27.85/dmt in March, may lead to a comparatively larger drop in Q3 for 62%-Fe terms, compared with 65%-Fe premiums.

The Platts Atlantic contract blast furnace pellet premium, on the basis of Platts 62% Fe IODEX fines for a 65%-Fe pellet, was assessed at $82/dmt in April and May, at record high premiums and up from $67/dmt in March.

Ahead of Q2, pellet supply tightened due to Russia's invasion of Ukraine disrupting trade from the region and leading to sanctions around Russian trade, while ferrous scrap prices rose and high-grade iron ore spreads expanded.

Pellet premium settlements by other producers in some cases exceeded Vale's blast furnace pellet reference for Q2, on later negotiations and stronger demand than earlier anticipated due in part to the war in Ukraine.