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Higher EU pellet premiums boon to Cleveland-Cliffs

Nov 29, 2017 | 05:15 PM | Nat Rudarakanchana

Tags  steel, Cleveland-Cliffs, Cliffs, Lourenco Goncalves, iron ore, EU pellet premiums, pellet premiums, iron ore pellets hot-rolled coil

NEW YORK — As European Union iron ore pellet premiums rise, Cleveland-Cliffs stands to benefit in its long-term contracts pricing, chief executive officer Lourenco Goncalves said at an investor presentation in New York on Wednesday November 29.

While Chinese steelmakers cut back on pollution and reduce the use of sinter fines, increasing demand for pellets worldwide should support Cleveland-Cliffs’ pellet-focused business model, he said at Goldman Sachs’ Global Metals and Mining conference.

“Every time iron ore prices go up in the international markets, our contracts are positively affected,” Goncalves told analysts and investors. “And also, every time the pellet premium in Europe – pay attention to this one – goes up, our contracts are positively affected.”

Environmentally focused Chinese steel producers are likely to consume more pellets, which pollute less than sinter fines, the standard feedstock, he continued. But pellet supply is not easily rerouted to China, and as Chinese pellet premiums rise, so too will EU pellet premiums.

EU pellet premiums were around $35-36 per tonne at the start of 2017, but have now risen to $45 per tonne, Goncalves said. By comparison, Chinese pellet premiums were $16-18 per tonne at the start of the year, but have now risen to $54 per tonne - implying that EU premiums could rise further.

“As China is starting to fight pollution for real… that pushes pellet premiums up in China. Pellet premiums in Europe will also go up, and that will have a positive impact on us,” Goncalves said.

Into 2018, he forecast that US hot-rolled coil prices will “slowly but surely creep up,” with or without any Section 232 import curbs. The underlying US economy will still be robust, he added, echoing past remarks.

As for Cleveland-Cliffs’ $700 million, 1.6-million-tonne-per-year hot-briquetted iron plant in Toledo, Ohio, the success of that project is a “no-brainer,” Goncalves said. That production will be “sold right off the bat” and will displace “very unreliable” import supply from countries like Venezuela, Brazil, Ukraine, Russia and even India, he said.

Introducing Goncalves, Goldman Sachs senior metals and mining analyst Matthew Korn made the point that hopeful developments in both US steel supply and demand failed to materialize in 2017, despite much anticipation. Import curbs stemming from the 232 haven’t yet happened, while an infrastructure stimulus also hasn’t been announced, Korn said.

Still, after tax reform, there’s a big chance that “something” will be announced in 232 sanctions, Goncalves said, even if it’s not the “full-blown” 232 remedy previously anticipated.

That “procrastination” on executing the 232 properly was the biggest theme of 2017 for steel, he said, noting that these delays enabled importers to “double down” several times and bring on a flood of imports to the United States.

Metal Bulletin’s latest iron ore pellet index, for 65% Fe pellets cfr Qingdao, stood at $122.70 per tonne on Friday November 24. The daily index for 62% Fe sinter fines, a lower-grade material, stood at $67.92 per tonne cfr Qingdao on November 29, indicating a spread of $54.78 per tonne.

Nat Rudarakanchana


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