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China may see shift towards pellets from lump as winter approaches: sources

Singapore — With the winter season approaching, market sources said this week they expect an increase in end-user utilization of pellets over lump amid rising lump prices at ports and forecasts of increased pellet supply into China.

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A switch to pellet would be a reversal of the decision of many Chinese end-users to replace their pellet usage with lump in the blast furnace for higher cost effectiveness in July and August.

"Towards August 2019, a weakening in iron ore prices and lump premiums steered Chinese end-users towards switching their direct feed material of choice to lump from pellets due to its better cost effectiveness, given the lump-pellet spread," an international trader said.

However, the market has changed since then. "Lump prices and premiums have increased at the ports on higher utilization and tightening supply for Pilbara Blend lumps (PBL)," a Chinese trader said. PBL was previously trading in late August at around Yuan 780-790/wmt, compared to over Yuan 820/wmt currently, a procurement source said.

Meanwhile, S&P Global Platts assessed the weekly 64% Fe pellet index at $105/dmt CFR China this week, down from $138/dmt CFR China assessed on July 3.

HIGH LUMP VOLUMES IN JULY

End-users "expected lump premiums to continue weakening in view of the high spot volumes sold in July," a source said.

According to Platts data, BHP sold a total of 0.98 million mt of Newman Blend lump (NBL) in July, compared to 0.41 million mt in June and 90,000 mt in August.

Also, although other lump brands at the port do not face the same tightness in supply as mainstream Australian lump brands, market sources saw strong limitations for end-users in switching over to alternative lump brands.

"Northern end-users prefer to utilize NBL while eastern mills have a preference for PBL. End-users are only able to replace a very small amount of PBL and NBL with other lump brands like Kumba, Assmang and Roy Hill lump due to vastly different sintering qualities which will affect the blast furnace performance," a procurement source said.

SWITCHING TO PELLETS

Although major end-users do not alter their blast furnace blending ratios frequently in a short period of time to avoid disrupting performance, sources said switching to long-term usage of pellets over lump in the fourth quarter could be beneficial in terms of cost effectiveness.

"Aside from expectations of stringent winter pollution controls which will support pellet usage, there has been an increase in pellet supply to China from various producers due to weak European demand," a Chinese trader said.

"Expectations are for such a trend to continue, which should lead to a narrower lump-pellet spread, increasing the cost-effectiveness of pellet," the source added.

"Aside from Vale, other European producers are looking to resell their pellet cargoes meant for European consumers into China as it is the only market with sufficient volumes to purchase this excess supply," another international trader said.

"Given the large volumes of supply, with around another 4 million mt of pellet originally meant to be sold into Europe expected to be offered into China, these pellets are expected to be sold at discounted prices to the usual Indian spot pellet price levels, which will encourage Chinese end-users to utilize them," the source added.

"There will still be some short-term support for Indian pellet prices at the ports as there are some end-users with a fixed utilization rate for them, but it is probable that they may begin changing their procurement preferences as Indian pellet producers will tend to sell into their domestic Indian market if export prices are not attractive enough," a producer said.

Although the different chemical compositions of certain European pellet brands would necessitate some altering in the blast furnace feedstock, market sources were of the view that it would not be a major issue given its attractive physical specifications of low alumina and low-medium levels of silica.

-- Jun Kai Heng, jun.kai.heng@spglobal.com

-- Edited by Shashwat Pradhan, newsdesk@spglobal.com