India's pellet production drops on falling exports in Sep'21. Will the trend reverse soon?

India's pellet production has been impacted of late and total output in Aug-Sep'21 has been lower than usual monthly production levels, as per data available with SteelMint.

Pellet production in Sep stood at 5.33 mn t, while the country's pellet output in Aug was around 5.4 mn t, SteelMint data shows. These figures are decidedly lower than the average ~6 mn t of production recorded every month.

India's current pellet capacity has exceeded 100 mn t and total production in 2020 was more than 65 mn t.

Fall in export demand

In a sure sign of the inter-connectedness of the global steel industry, domestic pellet production has taken a hit due to lack of export demand - mainly from China. Mandated not to produce more than 1.065 billion tonnes of crude steel in 2021, Chinese steel mills are curbing production to offset the 12% rise in steel production in the first half of the year.

The China Iron & Steel Association (CISA) recently announced that steel production is likely to be around 1.04 bn t in 2021. The gloomy outlook prevailing due to restrictions on steel production in China pulled down global iron ore prices from a record high of over $230/t for benchmark Fe 62% fines in May to around $100-110/t at present.

India's pellet export shipments were 2.21 million tonnes (mn t) in Q2FY'22, as per SteelMint data. Shipments fell by 39% (year-on-year) vis-a-vis 3.62 mn t in the same period last year. The drop in export shipments was mainly due to falling export realisations resulting from the loss in China's buying appetite.

India's pellet export shipments were recorded at 0.24 million tonnes (mn t) in Oct'21, hitting over 5-year low, as per data maintained with SteelMint. The shipments fell by 50% m-o-m compared to 0.47 mn t in Sept'21.

India exported more than 13 mn t of pellets in FY'21 and SteelMint data reveals that total exports till Sep this year stands at roughly 9.5 mn t.

The restrictions on iron ore sintering in China have led to demand for lump material surging, and preference for domestic pellets resulted in imports falling rapidly. This trend is likely to intensify as stricter steel production measures are put in place during the winter season.

SteelMint's pellet export index (Fe 64%, 3% Al, FOB east coast) fell from $246/t in the beginning of Jul to $122/t in end-Sep'21 - a sharp decline in export realisations which compelled pellet makers to divert their volumes to the domestic market.

Plants take maintenance breaks

Now, weak export demand has resulted in pellet plants focusing mainly on the export market to avail of routine maintenance shutdown. As per SteelMint reports, a major pellet producer in eastern India with a capacity of 4 mn t/year had taken up maintenance-related shutdown much like another major pellet manufacturers in central India. KIOCL had undertaken temporary shutdown of its pellet plant for six weeks from 20 Sep'21 for rectification of indurating machine alignment, major repairs and other maintenance works.

A strong export momentum from Mar-Jul sustained the rise in domestic pellet prices, with more material getting channelled to exports. SteelMint's bi-weekly Raipur pellet index, Pellex, rose to nearly INR 17,000/t in May-Jun before falling sharply to INR 12,000-13,000/t levels from Jul through to end-Sep.

Weak export demand naturally meant more material getting diverted to the domestic market. However, despite a surge in trades witnessed in Sep, pellet prices remained subdued on low bids and buying interest amidst declining pellet export prices.

Iron ore sourcing drops

Therefore, a combination of subdued exports and mills announcing maintenance shutdowns impacted Sep production figures. SteelMint data shows that capacity utilisation levels fell to 50% or thereabouts for major export-oriented pellet producers and utilisation levels fell especially of merchant producers that have no means of captive iron ore sourcing. This is true of producers across the country.

In contrast, utilisation rates of producers with captive iron ore sources were higher. SteelMint data reveals that iron ore sourcing of some leading merchant producers, with capacities ranging from 2.5-5.5 mn t, has fallen significantly in Sep, although the trend has been evident since Aug.

In CY'21, pellet production has crossed 50 mn t till Sep and exports are at around 9.5 mn t. In FY'21, around 65 mn t pellets were produced, out of which 13.7 mn t of exports were recorded and the rest was domestically consumed.