Singapore — Prolonged tightness of high grade iron ore supply into China continues on strong demand from the Middle East and North Africa.
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Prolonged tightness of high grade iron ore supply has continued to affect Chinese end-user procurement preferences well into the first quarter of 2021. Market sources pointed to strong support levels for floating premiums for available high grade cargoes, following rising demand from MENA end users, with continued high take-up of term contract volumes and higher spot demand.
Shipment data seen by S&P Global Platts showed the total percentage of iron ore shipments from Brazil to China in January and February was around 68.9% and 63.6%, respectively, from an average of around 73.9% in the fourth quarter of 2020. Comparatively, Brazilian iron ore shipments to the MENA region in January and February were at 6.2% and 8%, against a Q4 2020 average of around 4%. Shipments to Europe were at 6.8% and 9.2% in January and February against a Q4 2020 average of around 5.2%.
Several traders indicated that continued strong demand for high grade direct reduction and blast furnace pellets would lead to sustained diversion of both pellets and pellet feed away from the Chinese market, even with supporting fundamentals for direct feed cargoes given ongoing sintering restrictions.
Chinese end users are still relying heavily on sinter feed usage to capitalize on current steel margins as it is still the most sustainable raw material form available, a procurement source said. High grade pellets are largely expected to be sold into term contracts as opposed to individual spot cargoes, as the usage of new products in the blast furnace might cause some disruption to steel production at a time of attractive steel margins, the source said.
Out of Acu port in Brazil, from where Minas Rio pellet feed is exported, a significant surge in MENA demand has been seen, affecting allocated volumes to China. The percentage of shipment volumes to China dipped to 9% and 13% in January and February, respectively, from around a Q4 average of 54%. In comparison, shipments to MENA surged to 75.7% and 55% in January and February from a Q4 average of 28.6%. Market participants indicated that the trend was a result of rising pellet premiums, in particular those for direct reduction pellets.
Vale's Q2 pellet premiums were set at $60.2/dmt for direct reduction pellets and $52/dmt for blast furnace pellets over the 65% index, up from Q1 premiums of $46.3/dmt and $40/dmt.
Market participants said the high premiums for direct reduction pellets were expected to persuade some MENA end users to source alternative high grade pellets and pellet feed for their own pelletizing purposes given the forward risk of expensive term contract premiums. Spot buying interest was also heard to have extended to certain low alumina Indian pellet cargoes, which are viewed as a low-cost direct reduction pellet alternative.
Canada follows trend, Ukraine doesn't
The trend was also seen in Canada, which ships largely pellets and concentrates, with 25.9% and 15.4% of their shipments in January and February respectively heading to China, down sharply from the Q4 average of 32.7%. It also shipped 13% of its volume in February to the MENA region, from previously insignificant shipment volumes. The 2020 average shipment percentage to the MENA region from Canada was 3.6%, indicating a higher willingness from MENA end users to incorporate Canadian high grade products as part of their steel production process.
An outlier to the trend was in Ukrainian iron ore shipments, which maintained a largely similar shipping percentage to China, although the shipment percentage to MENA was 7% in February against a Q4 average of 2.4%.
One of the key factors was the typical sintering usage of Ukrainian concentrates rather than pelletizing, market sources said, along with high take-up rates from European end users situated much closer to Ukraine's Yuzhny port.
An international trader also pointed to the different chemical composition of typical Eastern European pellets compared with those used by MENA end users, necessitating certain changes in raw material feeds for large-scale utilization.
Spot buying interest for high grade concentrates also remained high to attract continued volumes of sinter feed concentrates into China.
Procurement sources surveyed said that domestic Chinese concentrate production has only increased marginally in recent months, leading to stronger demand for imported concentrates.
Minas Rio concentrate was heard to be traded more than $6/dmt over the 65% index on a Notice of Readiness (NOR) pricing basis in recent weeks, from around $4.5/dmt in early February. Peruvian high grade concentrates were heard to have traded at a premium of around $8/dmt over the 65% index.
Current high premiums for sinter feed fines were also seen to have carried over to premiums for concentrates, which despite their less than ideal physical sizing, are valued for their high Fe content and low contaminant levels.