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Direct feed premiums continue to break 2021 highs despite sustainability concerns

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Direct feed premiums continue to break 2021 highs despite sustainability concerns

Highlights

Direct feed premiums driven by pollution controls

Growing concerns over sustainability of premium levels

Singapore — Direct feed premiums were driven to fresh new highs on March 24 due to stringent environmental controls in China's Tangshan and amid increasing concerns over the sustainability of the uptrend.

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Platts had assessed 65% and 64% blast furnace pellet premiums on March 24 at $60.95/dmt and $45.15/dmt over front month 62% swaps, breaching the 2021 high of $53.60/dmt and $43.80/dmt, which were assessed on March 17, respectively. Both pellet premiums also breached multi-year highs of $63.85/dmt and $47.55/dmt last reached in November 2018.

The spot lump premium was assessed at an all time high of $0.5425/dmtu on March 24, over and above the previous high of $0.515/dmtu earlier in this week.

As direct feed premiums become increasingly expensive, in light of China's additional restrictions on sintering and steel production, market participants highlighted the potential of a growing lack of liquidity.

Attractive steel margins will encourage further utilization of direct feed to maximize production efficiency within prevailing constraints in theory, but end-users are also concerned should they be stuck with high lump utilization rates when restrictions are lifted, or steel margins fall, a procurement source said.

A significant increase in pellet or lump usage in the raw material feed usually occurs when end-users have a fixed longer term view on the current restrictions and steel margins given the inertia involved in reverting back to lower levels of usage and increasing the sinter feed blending ratio due to operational constraints.

Some market sources pointed to portside lump premiums of over 60 cents/dmtu as another driving factor for the lack of seaborne liquidity as sellers sought to sell their cargoes there as opposed to the seaborne market.

The only end-users that may take seaborne lump cargoes at those prices would be riverport-based mills given their lack of procurement alternatives, a Chinese end-user said.

According to market participants, there has been an increase in end-users reselling their contracted lump cargoes at either the seaborne or portside market given the prevailing high premiums.

Some end-users see higher overall profitability in selling their lump cargoes at current premiums and scaling down their production to rely more on sinter feed, an international trader said.

While some market participants view such reselling activity as signs of a lack of sustainability for lump premiums, others dismissed this notion on the basis of strong lump demand from Japanese end-users.

There is still strong lump demand for April shipments from Japan, but given the current high Supramax freight rates, it might be economically viable for them to procure seaborne cargoes as opposed to buying them from Chinese ports, another international trader said.

Market sources had expected short-term support for pellet premiums given prevailing high lump premiums, and their comparatively more attractive Value-in-use, or VIU.

OVERSUPPLY IN INDIA

However, there are growing concerns of a possible oversupply of Indian pellets in the second quarter as the Indian financial year comes to a close end-March.

The forecast for a slowdown in domestic Indian steel production will likely carryover to an increase in pellet exports, with smaller producers likely to seek overseas buyers as well, a seller said.

There is still good demand and strong buying interest from certain traders and end-users with limited access to the portside market, but their overall demand is definitely much smaller than the expected export volumes, the source added.

There will still be speculative buying interest, a Chinese trader said, but liquidity in the secondary market will dip as more reselling activity will shift towards the portside market.