China's pellet imports drop by over 50% in Jan-Nov'21 on steel production curbs

Iron ore pellet imports by China, the world's top steel producer, has dropped sharply to about 21 million tonnes (mn t) in the Jan-Nov'21 period compared to around 43 mn t in the corresponding period last year. Total imports in CY'20 stood at around 45 mn t, as per SteelMint data.

Pellet shipments into China declined, year-on-year, by over 51% in the first 11 months of CY'21 on the considerably higher base of 2020 as well as the bleak steel production scenario in China that unfolded since the beginning of H2CY'21.

India remained the largest exporter to China accounting for 6.8 mn t out of 21 mn t of total imports during Jan-Nov. However, imports from India have dipped vis-a-vis 11.25 mn t in the year-ago period.

On the other hand, exports from Ukraine, a leading pellet supplier to China, dipped to 3.7 mn t against 8.2 mn t last year - a sharp drop of over 54%. Imports from the other major CIS supplier, Russia, dropped even more sharply to a little over 229,000 t in Jan-Nov in comparison with 4.6 mn t in the year-ago period.

Imports from Brazil, the world's leading seaborne pellet supplier, plummeted even more drastically by more than 70% to just about 1.8 mn t during the period compared with nearly 6 mn t in the same period last year.

China is the world's largest importer of pellets, accounting for 23% of the total seaborne pellet trade between CY'16 and CY'20. On the other hand, Brazil is the largest exporter, accounting for 25% of total pellet exports during this period.

Why imports rose in 2020?

Chinese pellet imports surged in CY'20 on strong demand as a result of the economic rebound since Mar-Apr'20 - at a time when most other major economies around the world had been paralysed by the pandemic. The infrastructure and construction sectors in China received a major boost in 2020 as the government announced a slew of fiscal measures to fight off the recessionary impact of the pandemic.

Thus, steel demand in China increased fast, while the world at large went into lockdown. Chinese demand sustained pellet producers in India and the CIS at a time when domestic steel demand in these regions had dried up. China, therefore, emerged as a safety valve.

From the Chinese perspective, however, cost was the sole guiding factor: domestic prices of steelmaking raw materials were far higher than prices in other parts of the world that were suppressed following the outbreak of the pandemic. Domestic pellet prices in China were higher compared to imports, resulting in increasing purchases from overseas suppliers.

China imported 45 mn t of pellets in CY'20 against 32.6 mt in CY'19. On the other hand, Brazil reported a fall in pellet exports due to continued supply-side constraints as an aftermath of a deadly tailings dam disaster.

Leading pellet supplier, Samarco (a Vale-BHP joint venture) has resumed operations after a long pause. However, production is expected to be around 7-8 mn t in 2021 against a capacity of over 30 mn t per annum.

Brazil reported around 60% decline in its total pellet exports to 15.5 mn t in CY'20 from 34.7 mn t in CY'18 following Vale's tailings dam disaster in 2019. While this led to an 11% decline in total seaborne pellet trade, Indian pellet exports rose by 75% to 13.1 mn t in CY'20 from 8 mn t in CY'18 to partially bridge the gap created by falling Brazilian exports. India was the biggest beneficiary of the curtailment in Brazilian exports in 2020.

Why China's pellet imports fell in 2021?

The situation, however, changed dramatically in 2021. China's crude steel output increased 12%, y-o-y, in H1CY'21. The government went into an overdrive to contain and/or lessen production vis-a-vis 2020 production of a record 1.065 billion tonnes, with an eye on controlling carbon emissions and environmental pollution.

In addition, the Chinese government tightened fiscal measures this year in order to restrain escalating debt in the construction and property markets - a sector that accounts for around 35% of the country's steel demand. Iron ore and pellet exports took a hit as a result of rampant steel production curbs.

Although emissions control calls for usage of high-grade ore and pellets, Chinese steelmakers prefer domestic pellets in view of the cost factor, as supply shortage in the global market has pushed up pellet prices, with suppliers demanding ever more premiums to guarantee low-impurity products.

Moreover, steel production curbs have impacted demand as well as margins of mill owners as steel prices have remained static amidst rising iron ore and coal prices. Domestic power shortage in China -arising from shortage of coal - have hampered production and demand for raw materials.

Also, rapidly falling global iron ore prices has decreased the spot seaborne iron ore lump premium, which has made lump more cost effective than pellets.

Outlook

China is aiming to ramp up domestic iron ore concentrate output by another 100 mn t by 2025, the objective being to sustain 45% of steel production with raw materials generated domestically. China's run of mine (ROM) iron ore production increased to 880 mn t during Jan-Nov'21 against 868 mn t in CY'20. Domestic pellet production stands at around 200 mn t, with capacity being added at a fast pace.

Winter production cuts and bleak steel production outlook seems to be discouraging pellet imports. However, restocking ahead of the Lunar New Year holidays in China (from 1-6 Feb'22) is expected to provide a fillip to pellet demand.