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INDEX ANALYSIS: Pellet Premium Holds Flat Despite Sinter Restrictions

The last week saw Tangshan Municipal People's Government implement a Class I emergency response on heavily polluted weather from March 1 to March 6. As part of this action there have been heavy restrictions on sintering across the Tangshan area.

When sinter bans are implemented, typically the demand for pellet and lump in the burden mix will increase which could impact the premiums of these products. During this most recent restriction there have been a number of market factors that resulted in a flat pellet premium and only a slight uptick in lump. These include the furnace burden mix, mill margins, inventories, supply and demand.

The pellet ratio in the burden mix has reached a level not seen since January 2015. According to Mysteel's mill survey data, the proportion of pellets in the furnace in on March 1 was 14.7%, an increase of 0.73% above the 2018 average and an increase of 2.68% from the 2016 average. The use of pellets has increased over the winter period, however despite this increased demand the premium has stayed flat in the short term.

This could in part be due to the available pellet stocks at port. According to Mysteel's inventory data of 45 Chinese ports, pellet stocks increased by 338,000 tonnes in one week, reaching 4.83 million tonnes in the last week. This is the highest pellet stocks observed across China since January 2017.

Looking to mills existing raw material stocks, given the continued environmental protection and production restrictions, mills have built sinter stocks to allow production to continue as normal despite emergency cuts. Most mills in the north have over five days of sinter stocks, with some holding even more. This means it is not necessary for them to panic buy more pellets and lump during environmental restrictions. The current 6-day restriction is viewed as only a minor extension to the heating season for most steel mills, and therefore mills suggest this will not have a significant impact on current production.

At present steel mill margins are low and under pressure, therefore high-priced iron ore resources are not favoured by mills. They are looking to purchase cost effective lower grade fines resources rather than purchasing higher cost premium pellets. 

Finally, as spring approaches and the weather improves in the North of China, the main pellet producing area, domestic pellets are more abundant. The lower price of domestic pellets versus imported may result in a drop-in demand of imported pellets and reduce the proportion used in the burden mix. This lower demand could negatively impact the pellet premium in the short term.

Despite the environmental restrictions over the last week, the pellet premium was not impacted and remained flat. Mills are prepared for the ongoing environmental action and at present seem too focused on cost to move to purchase more imported pellets, especially when the stocks at port are plentiful.


Written by George Zhou and Nina Zhao, Index Research Analyst, zhouyj@mysteel.com zhaonn@mysteel.com


Edited by Alina Arnold, Head of Indices, alina.arnold@mysteel.com


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