A worker holds a handful of iron ore pellets at a mine in Ukraine. (Photographer: Vincent Mundy/Bloomberg)

How Rising Prices Of Iron Ore Pellets Are Helping Indian Steelmakers

Prices of iron ore pellets jumped to their highest in three years in August, benefiting exporters of the key steelmaking raw material. Indian steelmakers too stand to gain as they remain insulated from the hike since they produce their own pellets.

Prices of pellets rose 29 percent over the last one month to Rs 8,100 a tonne, according to Edelweiss. This has also pushed up prices of finished goods. Such rates are likely to persist over the next few months, benefiting steelmakers, it said.

There are three reasons that are driving pellet prices:

  1. Environmental concerns are driving China’s appetite for high-grade pellets.
  2. Outage at Brazil’s Samarco mines. The mines are unlikely to start operations this year.
  3. Force majeure by Swedish player LKAB disrupted third-party supplies.

Average price of pellets is Rs 6,797 per tonne in the ongoing September quarter, higher than the Rs 4,000-5,000 a tonne level in financial years through March 2016 and 2017, according to the report.

Some correction is now possible in pellet prices after the sharp rally due to Chinese demand, said Hetal Bhatia, analyst at Equirus. But the prices would still settle at significantly higher levels than in the first quarter of the ongoing financial year, Bhatia added.

A rise in pellet prices will benefit steelmakers, ore producers and exporters like Jindal Steel & Power Ltd., Jindal SAW Ltd. and Godawari Power & Ispat Ltd., according to the brokerage.

Increasing crude steel production ahead of more stringent winter cuts (compared to last year) led to a steep hike in export of pellets, creating a supply shortage in the domestic market, according to Equirus Research. This led to better pricing for local producers like Sarda Energy & Minerals Ltd. and Prakash Industries Ltd.

Current offers for pellets in the exports market is $140-150 a tonne compared to $120-125 a tonne in the previous quarter. That’s because of huge European demand due to force majeure at LKAB, said Amit Dixit, analyst at Edelweiss.

Steelmakers like JSW Steel Ltd., Tata Steel Ltd. and JSPL will benefit due to a rise in price of sponge iron, mainly made from pellets.

Higher pellet prices are likely to result in higher sponge iron prices and thereby higher rebar prices. This will help captive sponge iron producers, as prices travel across the value chain, said Goutam Chakraborty, analyst-institutional research at Emkay Global Financial Services Ltd. They are also able to pass on the high cost to consumers on account of a strong demand.

Ore producer NMDC Ltd. recently hiked prices on a surge in pellet price. Higher prices of pellets, also a close substitute for lump, has led to a rise in prices of lumps and fines, Chakraborty said.