Status of the Iron Ore Pellet Market
August 2017
The Atlantic Pellet Premium has been less volatile than the Chinese Pellet Premium over the last year and a half. The Atlantic premium gradually increased over 2016, before a step change up in 2017, and has been stable ever since. However, the Chinese pellet premium has seen greater volatility, and in late 2016, it was near the Atlantic Premium due to a shortage of domestically produced pellets in China following a shortage of domestic ferrous feed suitable for blast furnace pellet production. The Chinese Pellet Premium instead generally tracks with the Chinese Lump Premium as blast furnaces in China can often adapt their burden blend to substitute these two products.


Pellet Production 

Iron ore pellet production in 2016 was 380Mt and is forecast to increase to 420Mt by 2018. There remains a shortage of pellets in the market, and this trend is expected to continue, due to Samarco’s absence from the market, and environmental pressure placed on Chinese steel-makers to reduce their emissions from sinter production, and thus, substitute into pellets.

Vale is forecast to remain the largest producer of pellets over the next two years. Production was 39Mt in 2016, and this is forecast to increase by 15-20% over the next two years with the probable resumption of Samarco. Vale’s pellet costs are expected to remain in the mid second quartile. BHP and Vale had previously indicated their plans to return Samarco to production in late 2017. In recent months, this rhetoric has changed and with continuing legal and permitting delays following the 2015 dam failure, it now appears that production is unlikely to resume till mid-2018.  

On a country basis, Chinese producers are the largest contributor globally with production in 2016 estimated at 120Mt. With low iron ore prices forecast for the next two years, only 1% per annum growth is expected in the Chinese pellet industry until 2018. 



The global weighted average pellet plant cash cost in 2016 was US$61/t. The cost of purchasing or producing ferrous feed remains the largest cost component for pellet plants with ferrous feed costs, averaging 67% of pellet plant costs in 2016. With the exclusion of ferrous feed costs, and freight, the cost of pelletisation was US$15.50/t in 2016. This cost has been relatively stable since 2010, falling from $16.80/t, and is expected to experience a
2-3% rise over the next 2 years. The major operational fluctuating item for pellet plants has been the energy cost. Energy costs for pellet plants on average have fallen 5% per year since the end of the mining boom and are forecast to have been at their lowest level in 2016. Moving forward we see energy costs rising 8% per year to 2018.

Pellet producer margins decreased slightly in 2016, with pellet premiums in general hovering around US$32/t throughout the year. The Chinese Central Government’s commitment to tackle pollution will support pellet demand going forward. The steel industry in China, particularly in the Hebei province, is a major source of air pollution, and is facing increasingly strict environmental regulations. To meet these requirements, the Chinese steel industry will shift from higher polluting sinter feed to imported direct-charge ore, such as pellets. 

Metalloinvest’s 10Mtpa Lebedinsky GOK pellet operation is estimated to be among the cheapest blast furnace and direct reduction pellet operations at US$30.40/t in 2016. Lebedinsky GOK possesses its own source of pellet feed and is located adjacent to the mine which allows for a significant reduction in freight costs. Average pellet plant costs were lowest in the CIS region, particularly in Kazakhstan, Ukraine and Russia, at US$34–47/t. In this region, most producers have captive sources of concentrate and pellet feed supply. Ukrainian, Russian and Kazakhstani producers also benefited from continued currency depreciation.