SHANGHAI, Aug 23 (SMM) – Iron ore pellet premiums are likely extend their gains as overseas supplies of pellet shrink and as domestic production of iron ore concentrate dwindles. Robust demand from steel mills will also support prices.

Premiums of imported 63% iron pellets, over prices of iron ore concentrate, climbed over 43% from the end of June to $63/mt as of Wednesday August 22. Premiums for 65% iron pellet also rose 51% from late June, to $75.5/mt as of August 22. 

Pellet production at major foreign suppliers shrank in the year to August, SMM learned. Swiss-based Ferrexpo saw its pellet output for the second quarter fall 2.9% from the first quarter after it undertook 65 days of maintenance. The commodity trading and mining company has iron ore mining capabilities in Ukraine. Pellet production at Rio Tinto's Iron Ore Company of Canada (IOC) stood at 3.24 million mt in the first half of the year, down over 38% from a year ago. 

As of August 22, pellet inventory at ports fell to the lowest this year, down over 18% from two months ago, SMM data showed. 

Domestic production of iron ore concentrate, a raw material in pellet production, also fell sharply by 11-12 million mt year on year in the first six months, SMM calculated. Continued production cuts accounted for the decline. These include cuts for the 2017-2018 heating season that ended in April, environmental cuts in Jiangsu's Xuzhou from April to July, cuts for the Shanghai Cooperation Organisation (SCO) summit in June, as well as frequent cutbacks in Tangshan city. 
 
China also stepped up annual inspections on pellet production lines from June. The intensified environmenal focus is likely to affect production across shaft furnaces for the remaining to 2018, and this will exacerbate supply shortages.

On demand, the average pellet proportion in raw materials across Tangshan mills rose from late July to 14% as of August 22. Mills had to use higher grade materials to guarantee output while environmental restrictions limited capacity across blast furnaces. The proportion of lump ore started to fall from the middle of July, SMM learned. 

As environmental cuts buoyed coke prices, a higher pellet proportion will lower the use of coke in raw materials and reduce overall costs. As of August 22, prices of metallurgical coke in Tangshan jumped over 400 yuan/mt, or 21%, from the end of July. 

Demand for pellet across steel mills is likely to grow as they keep up production of molten iron in the face of severe environmental restrictions. The high margins of rebar and hot-rolled coil, both exceeding averages of 1,000 yuan/mt, will continue to support consumption.