Atlantic pellet: Murky price talks cloud 2020 outlooks

Several sources confirmed they have not yet seen any official term-contract offers put forward for 2020 pellet supply. Expectations for Atlantic pellet premiums are broadly cited in the low-mid $30s per tonne. One bank's 2020 projection was noted at $41/t for blast furnace grade.

The Atlantic pellet market is "clear as mud", one market participant said, lamenting that it is difficult enough to pin down fourth quarter pricing after some contracts were opened for renegotiation, let-alone make firm statements about 2020. Some European mills have not yet confirmed whether they have finalised prices for their 2019 annual supply deals, causing some observers to conclude that some provisional pricing structures might still be in play and threaten to hang over into next year.

The debate over whether to use a 62pc Fe or 65pc Fe fines index as the base rumbles on in some parts of the Atlantic market, particularly given that spot pellet offers in the second half of this year were based on a 62pc Fe fines index. Many market participants expect that the Atlantic pellet market's gradual shift toward some shorter-term contracts will continue next year, but one noted that such a trend will be problematic if negotiations remain as long-drawn-out as they have been for 2019.

Atlantic pellet premiums in the mid-$30s would be a steep drop from 2018's premiums of $58/t for BF grade and $62/t for DR grade. But they are still considered to be historically fairly high and likely to generate strong profits for most suppliers — particularly if applied over a 65pc Fe fines base.

But some onlookers are questioning the significance of 2020 price projections to the long-awaited restart of Brazil's Samarco, currently slated for late next year. The project — a joint venture between Brazilian producer Vale and UK-Australian firm BHP — will initially produce around 7mn-8mn t/yr, significantly below capacity, with resulting economic implications. There will also be as-yet-unknown operational and regulatory costs associated with the restart, which will further impact project economics and necessitate a higher pellet selling price once 2021 comes into focus.

Samarco lately restarted talks with some of its previous customers, some market participants confirmed. This activity is largely focused in Asia, but it is expected that Samarco will also be looking to place some cargoes in Europe. A market participant noted that the talks do not directly concern contract negotiation, but are an attempt to reconnect and "scope out the market for 2021". "This is probably the strongest signal we've seen that Samarco is really coming back," they added.

Samarco's restart is likely to start hitting sentiment as it draws nearer. But for now, Atlantic market participants are more concerned about the state of the European steel industry and mills' profit margins.

"It's a tale of two types of market," a source commented. Asian steelmakers have lately enjoyed a widening of profit margins, enabling them to buy more high-grade direct charge material such as pellets. But European mills' margins remain under considerable pressure, meaning they may keep leaning toward cheaper direct charge material such as lump and continue to show higher-than-normal interest in CIS pellets.

The Argus daily fob Tianjin index for hot rolled coil (HRC) is at $458/t today, having risen by $32/t from a 2019 low of $426/t fob in late-October. By comparison, the Argus northwest Europe HRC assessment has regained €15.25/t since its 2019 low of €412/t ex-works in mid-November.

Iron ore fines costs have increased in the past three weeks, with the Argus ICX index for 62pc Fe fines now at $88.50/dmt cfr Qingdao, up from $78.15/dmt on 11 November.