Analysis: Pellet pivot: China develops taste for high-grade iron ore as coastal furnaces fire up
20/08/2019 06:27
* Nearly 25 mln T new coastal capacity in 2020 - Rtrs
calculation
* Up to 20% of China's annual ore demand to shift to higher
grade
* Mills to add pellet use to improve efficiency, reduce
emissions
* Domestic pellet feeds output may fall amid tighter
regulations
By Muyu Xu and Gavin Maguire
BEIJING/SINGAPORE, Aug 20 (Reuters) - China's demand for
iron ore pellets and high-quality ore is expected to accelerate
in 2020 as a result of Beijing's push to shift dozens of steel
mills to coastal regions in its battle to stop smog blanketing
industrial cities.
Relocating plants to the coast, with stricter environmental
requirements, means up to 20% of China's
more-than-a-billion-tonne annual ore demand will shift from
lower- to higher-grade ores within coming years, according to
industry sources and a Reuters analysis of official import and
production statistics.
Steel executives say the demand shift in the top ore market
will mean declining purchases of low-grade supplies and greater
demand for pelletised ore of a higher grade - with potentially
major implications for ore exporters in Australia.
"Iron ore producers who can sell pellet-feed into China will
be better placed than those who don't have such products," said
Ian Roper, general manager at Shanghai Metals Market, a Chinese
metals market research company, "with the major Australian
(lower-grade) specialist suppliers facing the biggest challenge
in the medium to longer term."
Brazil's Vale SA VALE3.SA , the world's biggest iron ore
miner, is also the top producer of pellets and pellet feed. LKAB
in Sweden and Switzerland-based Ferrexpo FXPO.L are the
second- and third-largest pellet producers. urn:newsml:reuters.com:*:nL4N1U84XR
Vale declined to comment for this article, but directed
Reuters to its Aug. 1 quarterly earnings call, where it stated
pellet production would be 45 million tonnes for 2019, down from
55 million tonnes in 2018 due to outages at some of its
Brazilian operations. LKAB and Ferrexpo declined to comment.
BIGGER, CLEANER, PICKIER
Over a four-year campaign against pollution, as well as
excess capacity in heavy industry, China has shut 700 small
steel mills with 140 million tonnes of steel capacity deemed
sub-standard, plus 150 million tonnes of inefficient capacity at
larger firms.
Remaining mills will need to further cut emissions, and
those located in the smog-prone eastern rust belt must move to
designated steel parks along the coast, where fragile
eco-systems mean environmental regulations are strict.
urn:newsml:reuters.com:*:nL3N1VE4AQ
More than 50 Chinese steel companies pledged in 2018 to shut
old capacity and build new furnaces with a combined yearly
capacity of 60.29 million tonnes, according to a Reuters
analysis of official industry data. Nearly 25 million tonnes of
this new capacity is scheduled to come on line in 2020.
Another 33 firms will build 47.03 million tonnes of new
capacity within the next three years.
These new plants will each house bigger, more efficient
furnaces with annual capacity of more than 1 million tonnes,
compared to 550,000-650,000 tonnes previously.
They will also boast lower emissions but require higher
quality ore and more pellets to minimise pollution and optimise
output, industry experts said.
"It's much more expensive to fix big furnaces than the
smaller ones," said a purchasing manager at a mid-sized mill in
Hebei, China's steel hub. "So mills tend to feed them with
better raw materials, and adding more pellets will improve air
permeability in the furnaces."
The manager declined to be identified as he is not
authorised to talk to media.
PELLET PROS & CONS
Iron ore pellets, typically with 64% iron content or above,
can be shovelled directly into blast furnaces without going
through a dirtier process known sintering, where low-grade ore
is mixed with other products to create a blast furnace fuel.
"Using pellets in steelmaking consumes only one third of the
energy that using sinter ore does," said Li Xishan, assistant
general manager at Yangzhou Pacific Special Materials Co, the
biggest pellet producer in China, with annual capacity of 6
million tonnes.
Emissions of sulphur dioxide and nitrogen oxide will be cut
by 47-95% if mills cut out sintering and switch to pellets, Li
said.
Erik Hedborg, senior iron ore analyst at CRU in London,
expects Chinese pellet demand to grow more than 40% by 2023 to
roughly 190 million tonnes, from 140 million tonnes in 2018, and
keep rising.
China's current demand for pellets remains well below
overseas counterparts, at around 15-16% of all ore compared with
35% in Europe.
"We expect China to follow the rest of the world in terms of
pellet rates," Hedborg said.
While using pellets effectively shifts part of the dirty
production process offshore, they are more expensive than
lower-grade ore.
So far this year, pellet-grade ore for import has averaged
$30 per tonne above low-grade 58% ore, and about $12 a tonne
more than benchmark-grade 62% ore, according to data from
consultancy Steelhome.
This means any significant increase in pellet purchases may
come with a hefty price tag for cash-strapped mills.
HOME-GROWN OR SHIPPED IN?
Due to those enduring cost concerns, much of the initial
increase in pellet demand is expected by industry insiders to be
filled by domestic producers, who have a combined output
production capacity of 253 million tonnes and often undercut
international rivals.
But analysts question whether domestic suppliers will be
able to keep up with demand, given their own emissions
restrictions and limited supplies of pellet feed.
"We expect pellet feeds production in China to fall amid the
tightening environmental regulations," said Dr. Ming He, senior
manager at Wood Mackenzie in Beijing. "Hence mills will have to
buy pellets directly from foreign producers, as the cost of
making pellets with imported feeds would be too expensive."
China imported 18.67 million tonnes of pellets last year, or
1.8% of total iron ore imports, with 34% coming from India, 26%
from Canada and 14% from Brazil, according to Chinese customs
data.
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GRAPHIC: China's iron ore imports set for shake-up as mills
upgrade & move to the coast https://tmsnrt.rs/2N6CS3h
GRAPHIC: China steel mill capacity utilisation https://tmsnrt.rs/2N3VrVD
GRAPHIC: Major iron ore importers and exporters https://tmsnrt.rs/2YSY8Ay
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(Reporting by Muyu Xu in BEIJING and Gavin Maguire in
SINGAPORE; editing by Tom Daly and Kenneth Maxwell)
((muyu.xu@thomsonreuters.com; +86 010 66271298;))