China's demand for Indian pellets seen dwindling amid pandemic, geopolitical woes

The Chinese consumption of imported Indian pellets is unlikely to recover in the coming months after falling end-February, as the escalating Russia-Ukraine conflict and spike in domestic COVID-19 cases exacerbate demand concerns at a time when domestic steel mills struggling with weak margins are procuring cautiously.

China imported 327,000 mt and 1.25 million mt of Indian pellets in January and February, respectively, a multifold jump compared to 105,000 mt in December 2021, China customs data showed, as weather constraints kept domestic concentrates supply limited. Sintering restrictions amid Winter Olympics in February further supported demand for direct feed like lump and pellets.

Prices for both 63% and 65% Fe Indian pellets jumped nearly $20-$30/dmt by the end of February, according to S&P Global Commodity Insights data.

However, the demand outlook appears bleak amid the ongoing Russia-Ukraine war and surging pandemic in China, according to market sources.

Following Russia's invasion of Ukraine, buyers of Indian pellet cargoes looked to sell low alumina pellets into Europe, as they expected supply bottlenecks due to the war.

Since the invasion began, around six cargoes were sold on an FOB basis to international traders, at prices way beyond the reach of Chinese market participants. There were other transactions heard in the market as well, direct from Indian producers to steel mills in Europe.

On the Chinese front, demand from end-users failed to pick up as expected, and most end-users were heard still procuring at Chinese portside on a need-to basis.

Amid sharp volatility in the 62% Fe iron ore prices and weaker finished steel demand, Chinese steelmakers started to feel the pinch, with margins narrowing starting mid-March. Mill sources said that margins for reinforcing bars and hot-rolled coils ranged around 100 Yuan/wmt and 300 Yuan/wmt, respectively, with some seeing even lower returns when portside prices rose significantly.

As a result, demand for low and heavily discounted medium-grade fines strengthened at portside, especially for fines like Super Special Fines, Jimblebar Fines, SP10 Fines and Roy Hill Fines etc. Several sources noted that with mills focusing on cost-effectiveness, using 63%-66% Fe domestic concentrates and low- to medium-grade fines blend helped lower overall raw material costs amid resilient coke prices in China.

Steel mills also showed stronger preference towards using 65% Fe domestic pellets compared to 63% Fe Indian pellets due to their higher Fe content, lower alumina impurities and less quality variation, sources said.

"We have Indian pellet stocks at port, but there are no bids at all. Low alumina domestic pellets are being offered at around 1,500 Yuan/dmt inclusive of tax and transportation charges, while 63%-64% Fe, 3%-3.5% Alumina Indian pellets are being offered at around Yuan 1,400-1,440/wmt, excluding transportation charges," a Chinese trader said. "We are at a point where there's lots of cargoes in a drying market. Demand is that bad," another Chinese trader said.

With the current worsening COVID-19 situation in China, some mills were forced to operate at reduced capacity, and have even cut their portside buying.

Even though market participants earlier expected production recovery in April, the demand outlook appears weak for now and imported pellets are unlikely to attract buyers until pandemic-led lockdowns are eased.