Singapore (Platts)--8Feb2013/527 am EST/1027 GMT

Brazil's Vale, the biggest iron ore pellet producer, has reached initial agreements with steelmakers in Japan for an annual blast furnace pellet premium of $28/dry mt, industry sources said this week.

The settlement, reached for the 2013 calendar year, marks a $4/dmt decline from the previous year's premium of $32/dmt. Contracts with some customers use the April-to-March fiscal year.

Other steelmakers in South Korea and Taiwan were said to have received Vale's offer at $28/dmt, and were evaluating it. Sources at European mills meanwhile said they were less keen to close one-year deals with Vale at that price, citing their desire for more frequent pricing.

"We are always in negotiations on pellet with Vale," a source at a European mill said. "And, we are still fighting on a quarter-by-quarter basis to get a price in line with the market."

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Another source at a European buyer said pellet prices were typically bilaterally negotiated, and stressed that any annual deal struck with a mill in Northeast Asia wouldn't be considered a benchmark.

A marketing official in Vale's Singapore office declined to comment on the matter.

The Brazilian miner has offered a lower premium this year because steelmakers, facing high raw material costs and weak margins, have reduced pellet procurement volumes, sources at two of the miner's customers said.

SOME BUYERS WANT MORE FREQUENT PRICING

Vale started its practice of negotiating an annual pellet premium in 2012, after about two years of experimentation with quarterly negotiations, resulting from a shift to price contracts off spot price indexes.

"At the time, they said it would help business continuity at their pelletization plants, as they were a bit tired of adjusting output frequently in line with prices changes," said a source at a large Chinese steelmaker. "An annual price is good for planning production."

But some customers, now used to quarterly or monthly contract prices for fines, are balking at the idea of an annual pellet premium. The pellet premium is applied on top of a quarterly base price calculated using the Platts 62%-Fe Iron Ore Index after deducting freight and a multiple of the 1%-Fe differential, Vale's customers said.

"An annual fixed price pellet premium is not acceptable to a lot of buyers," he said. "$28/dmt is definitely high, especially for a year. If steel output is improving, it's from a low base. There is a lot of lump, direct charge material out there."

In the second half of 2012, Vale was said to have cut pellet premiums below the agreed $32/dmt to some customers, as spot prices of fines fell, crashing to a 35-month low of $88.50/dmt CFR North China on September 6.

Other buyers pointed to lower-priced pellet premiums as seen from spot transactions into China, and said there was a need for Vale's price to be more in line with the spot market.

Spot material from the Ukraine and Russia were said by some sources to have been sold into China at a premium of about $21/dmt, with other sources cited premiums in the mid teens/mt.

But while the quality of pellet from these sources was considered "good," some have said Vale's product was superior in terms of chemical and physical properties, like the consistency of sizing and compression strength.

Sales by even Vale itself of pellet to mills in China may be of lower quality than what they supply other Northeast Asian mills, for example in terms of compression strength, an industry source said.

One other customer added that the relationship between pellet premiums and that for lump ore indicated that pellet has been overpriced.

"Pellet should be around twice as high as the lump premium," he said. "The current price is three times as much. This is too much; prices should come down."

A source at another pellet producer said he saw little interest to negotiate an annual pellet premium in Europe, and put the $28/dmt offered by Vale as "too low."

Pellet demand has risen, and the market has tightened as mills in Europe restarted since the fourth quarter, he said, adding that demand for direct-reduction pellet was strong.

Direct-reduction pellet is used more in the Middle East, the US and Southeast Asia, while most mills in Northeast Asia and Europe use mainly blast furnace pellet.

Vale idled production at its pelletization plants in Sao Luis and Tubarao since the fourth quarter of last year, citing a contraction in pellet consumption. Vale said it reallocated output towards the supply of sinter feed, which has gained in favor with customers.

The miner produced a record-high 55.1 million mt of pellet in 2012, a 2.3% increase from 53.8 million mt the previous year, mainly due to a ramp up of its operations in Oman, which produce direct-reduction pellet.

--Keith Tan, keith_tan@platts.com

--Hector Forster, hector_forster@platts.com
--Edited by Irene Tang, irene_tang@platts.com

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