Smelter demand in Europe, China to exacerbate global iron ore pellet shortage

Thu 02 Mar 23, 2:53pm (AEST)
Iron ore conveyor belt
Source: iStock

Key Points

  • Macquarie expects global iron ore pellet supply deficit by 2027
  • Pellet premiums down -50% from July 2022 after EU pig iron production collapsed due to high energy prices, low demand
  • Now Europe and China both reporting healthy smelter demand recoveries, but Macquarie sees not enough pellets to go around

After pig iron production collapsed in Europe in the first half of 2022, prices have collapsed nearly 50% to $46/tonne. 

But with recovering smelter activity in Europe and China put together, Macquarie analysts argued on Thursday the price has hit a floor in early 2023, and prices are set to rise again. 

That leaves the problem of a supply gap now facing the market.

Macquarie expects iron ore pellet premiums to average $59/tonne over 2023, eventually hitting $85/tonne “later in the decade.”

What are iron ore pellets? 

Iron ore pellets are used in steelmaking and related metal supply chains. 

There are two main types of iron pellet: 

  • BF Pellets: used in hot metal production by steel producers. Typically graded around 65% iron in line with major iron ore benchmarks.

  • DR Pellets: used as feedstock for the production of direct reduced iron (DRI). Grades are marginally higher, approximately 67% iron. DR pellets tend to attract a higher premium than BF pellets. 

What’s happening with smelter demand? 

After the output cut in the first half, that trend appears to be reversing in the Eurozone. 

So far this year, analysts highlight European blast furnace capacity has returned to 13 million tonnes. 

In China, demand in some parts of the country is returning to healthy levels in line with the country’s ongoing reopening.

From calendar year 2024 onwards, Macquarie argues global iron ore pellet growth will reach 182 million tonnes by 2027 (vs. 109Mt in 2022). 

Decarbonisation thematic 

DRI products are used to facilitate decarbonisation strategies from steelmakers, especially in the leading importer Europe, where relevant policies and regulations are more advanced. 

Within four years, by 2027, analysts argue demand will double on current volumes to 69Mt a year. 

Supply concerns 

By 2027, Macquarie expects iron ore pellet demand will outstrip supply by as much as 43Mt. 

“We suspect such large gaps will be closed via demand destruction given the challenges in bringing on new supply,” Macquarie analysts wrote. 

“For example, a sustained period of elevated pellet premiums could incentivise blast furnaces to substitute pellets for other products (lump, sinter, scrap where possible) freeing up material for DRI producers.”

Brazil’s Vale is the only one ramping up supply

Macquarie highlighted that Brazilian mining giant Vale is the only company expected to significantly grow the supply of iron ore pellets on the market. 

Vale is targeting a production increase to approximately 100Mt by the end of the decade. The Brazilian giant produced 32Mt in 2022. 

Macquarie included in its calculations Vale’s new iron ore ‘briquette’ product which serves a similar function to pellets. Briquettes, often used to describe coal imports, are what they sound like: small rectangles. 

Other large suppliers are Sweden and Canada. However, Macquarie argues increasing DRI demand in both of those jurisdictions will effectively cap how many pellets either country can send into world supply chains. 

What ASX-listed stocks could benefit? 

There aren’t too many iron ore pellet pure plays on the Australian bourse. 

One of them is Grange Resources (ASX: GRR). 

In July-August last year, it suffered a fairly significant drop in its share price, which lined up with the collapse in European smelter demand. 

For a closer look at iron ore producers on the ASX, you can read Market Index’s concise investors’ guide to Iron Ore here

GRR one year performance chart
GRR one year performance chart


Written By

Jonathon Davidson

Finance Writer

Jonathon is a journalism graduate and avid market watcher with exposure to governance, NGO and mining environments. He was most recently hired as an oil and gas specialist for a trade publication.

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