DRI producers see more strong demand for iron ore pellets in Q3

Direct reduction iron producers in the Middle East and North Africa continue to benefit from stronger demand at integrated steel mills and regional steel markets, which is supporting inquiries for iron ore pellets in the third quarter, according to market sources on May 25.

Despite sharply weaker benchmark ferrous scrap and steel prices, stronger DRI rates in markets such as Egypt, Saudi Arabia and Qatar, and a recovery in output in the UAE are boosting pellet requirements and orders. In addition, there may be related demand to offset reductions in metallics due to sanctions and trade restrictions for Russian and Ukrainian pig iron and hot-briquetted iron, as well as for steel products such as billets.

Ahead of announcements around Q3 pellet premiums – Vale reported Q2 DR premiums at $65.80/dmt, close to a record – buyers across the region talked up potential demand for high-grade DR pellets outstripping available supply, noting that regional steel fundamentals and spreads have continued to incentivize DRI's margins. The heightened interest in securing raw material is in marked contrast to the blast furnace pellet market, which is experiencing weaker demand and pellets taken out as hot metal rates fall, seen across China, Japan, the Americas and Europe in early 2022. The BF pellet segment is tied more to the global flat steel and automotive markets' softening outlook, despite prolonged supply interruption into some plants and regions from Russian and Ukrainian pellet producers as a result of the ongoing war, and a broader interest in pellets to produce lower emissions steel. A pellet producer noted stronger fundamentals in the DR pellet sector for Q3, while premiums in the BF pellet market may see varying levels in Q3 based on location and access to pellets with steel demand. Western European steel producers could potentially settle premiums at the lowest level globally, while negotiations for Q3 had yet to start, the source said.

In the first four months of 2022, Saudi Arabia produced 2.4 million mt of DRI, up 18% on the same period in 2021, while Egypt produced 2.05 million mt, up 21%, according to World Steel Association data. The UAE produced 875,695 mt, down 33%, while monthly rates have recovered after a DRI module underwent maintenance in early 2022. Even so, April DRI production in the UAE was 21% weaker than a year earlier. Qatari DRI output doubled to 490,279 mt over the four months. In Russia, DRI output was relatively stable, at 2.74 million mt over January-April, and April's total was 8.5% higher than a year earlier.

In Turkey, Platts benchmark import scrap prices fell to $465/mt CFR on May 25, down from over $650/dmt CFR in early April, according to S&P Global Commodity Insights data. Turkish export rebar prices have fallen by a similar amount over the same time, keeping rebar-scrap spreads relatively tight.

DRI-based steel mills may see stronger forward orders and limited imports pushing DRI output to maintain strong rates into Q3, despite strong pellet prices.

Platts DR pellet all-in prices were assessed in May at $220.07/dry mt FOB Tubarao, Brazil, down from $222.25/dmt FOB in April, according to S&P Global. While all-in DR pellet prices are much lower than the $296.42/dmt FOB peak in July 2021, the spread between DR pellets with scrap, adjusted for quality, and with steel products, tightened considerably through April and May. This trend may increasingly push regional DRI-based steel producers to compete in some markets with steel from the EAF route, with the backdrop of semi-finished steel and metallics trading from Russia.

Marginal DR pellet demand is increasingly driven by markets such as Qatar, Egypt, Algeria with new or existing DRI capacity with potential for additional requirements, along with supply reductions in newly developed DR pellets from Ukraine and Russia, and tight pellet volume continuing from Vale for another year.