Analysis: Iron ore pellet contracts, met coal pricing rise in Q1

9th April 2018

Atlantic Basin iron ore pellet contract prices rose in the first quarter, as higher premiums and iron ore fines references in China pushed up invoices, while Q1 met coal reference pricing strengthened, according to an analysis by S&P Global Platts.

Industry formulae using base iron ore fines prices and spot freight rates showed pellet invoices rose to $119.21/dry mt FOB Tubarao in the first quarter, from $94.66/dmt in the previous quarter and Q3 2017’s $101.92/dmt.

This is based on an average netback Brazil basis for reference IODEX 62% Fe fines with spot freight rates and a quality adjustment to 65% Fe basis, according to Platts calculations.

Invoices priced using prevailing iron ore base references are used as typical in this example: IODEX netback Brazil and Platts Midrange 1% Fe Differential for January to March 2018 for Q1 contract invoices.

A year ago, Q1 2017 contract blast furnace pellet pricing averaged $121.02/dmt FOB Tubarao basis, as despite lower premiums, stronger iron ore fines pricing and low shipping rates aiding netback FOB prices for Atlantic miners boosted invoices.

Platts assessed estimated Atlantic monthly contract blast furnace pellet premiums at an average $57.67/dmt over Q1, from $45.50/dmt averaging through Q4.

Strong demand for pellets in China on environmental grounds, as well as in contract markets such as Japan, Western Europe, the US, Trinidad and the Middle East, and continued absence of Samarco’s 30.5 million mt/year operation in Brazil, aided acceptance into miner’s new offers.

Underlying iron ore fines prices’ netback to Brazil rose in Q1 to $57.20/dmt, from $45.42/dmt in Q4 2017. While spot prices have fallen in the past few weeks, stronger pricing earlier in Q1 and some weakening in freight rates aided netback prices.

Industry-agreed fixed freight rates used to netback fines prices from China to Brazil for FOB sales may have remained lower than spot rates, supporting higher invoices rather than tying the adjustment to spot rates, according to Platts estimates based on industry shared data.

Negotiations around freight factor in use, as well as applying the bunker oil adjustment and other terms and conditions around quality, volume and timing, may lead to more variation in invoices and buyer’s interpretation of the pellet premium. This may occur despite the same headline premium being reported.

For DR-grade 67.5% Fe pellets, Q1 contract prices may have risen to $124/dmt FOB Tubarao basis, from $104.83/dmt in Q4. This is also up from $111.09/dmt FOB in Q3, based on Platts calculations.

The calculation uses an assessed DR pellet premium of $62.50/dmt in Q1, up from a $55.67/dmt average in Q4. While pellets and higher-grade fines continue to see demand, the relative performance of 65% Fe indexes over the 62% Fe reference weakened in Q4 from the previous quarter and in Q1 has slowly started to recover.

China cut some demand for high grade fines as some steel plants and sintering units shut to curb pollution levels over winter, while falling coke prices may have aided utilizing more lump and lower grade ores, based on prevailing discounts.

Met coal prices have remained higher since 2016, boosting costs for coke making and influencing iron ore selection in the burden.

Met Coal

Met coal premium low-vol Platts spot prices averaged $228.47/mt FOB Australia in Q1, up from $204.67/mt FOB in Q4 and $188.78/mt FOB in Q3.

Benchmark coking coal prices derived by spot market index-based formulas were set at around $237/mt FOB in Q1, up from $192/mt in Q4 and around $170/mt FOB in Q3, according to industry sources.

The price rise follows some mining and other shipment disruption, with strong steel margins and China’s large seaborne import demand increasing competition for resources with India and Japan limiting spot availability between the end of Q4 and most of Q1.

Miners in Australia, Canada and the US had been seeing good contract demand, with buyers in India, Europe and Brazil increasingly looking for alternatives to Australian prime benchmark coals.

In Q2 2017, settlements for premium met coal were first reached using spot market index calculations at around $194/mt FOB. The last bilateral industry negotiated settlement was $285/mt FOB in Q1 2017.

Ferrous scrap prices, an industry reference for electric-arc-furnace-based complexes and a raw material for integrated steelmaking plants, are also seeing support, with potential for greater demand in the US.

Benchmark Turkey import prices surged in March, after levels remained high since the second half of 2017. March averaged at $372/mt CFR Turkey, which is the highest for the month since September 2014.

Source: PLATTS