Brazilian iron ore miner Samarco's fatal accident last week may have limited effect on contract pellet premiums next year due to the bearish underlying steel market, international pellet buyers and traders said this week.
Samarco is due to ship its last pellets from Ponta Ubu around the end of November, based on market estimates, with its 30.5 million mt/year capacity now idled indefinitely.
Mills are not yet frantic, but are said to be likely bringing forward some purchases or restating loadings that they earlier may have delayed.
Samarco accounted for around 20-25% of the seaborne global pellet market, according to industry estimates.
Premiums will still fall next year, but perhaps not by the same degree on account of Samarco's loss of immediate supply, pellet buyers said.
Platts assessed November Atlantic estimated contract premiums at $30/dmt.
Some annual accords were signed in the low-to-mid $30s/dry mt earlier this year.
Prior to last week, sources expected a fall in premiums with buyers indicating a settlement in the mid $20s/dmt for 2016. Some had suggested a drop into the low $20s/dmt may be appropriate based on oversupply and weak steel rates and margins.
"For sure the pellet premium should go down, it's now hard to say by how much, the low $20s/dmt may not happen," a buyer said.
"It will be supportive to have such a quantity missing in the pellet market, but it was not tight in the last month."
The loss of pellets with high iron content and strong metallurgical and physical properties may be harder to substitute in the blast furnace process, as high quality pellets contribute to greater PCI injection and reduced emissions and slag, said a EU buyer.
A lot of European mills cannot easily switch to using lump instead, or boosting the ratios of lump based on overall value in use considerations, said the mill source.
Steel plants, mainly in Europe, the Middle East and some in Asia, will ensure they have sufficient pellet cover over the first and second quarters of 2016, another mill source said.
They may be revisiting other suppliers to bring forward contracted deliveries or use options to buy extra cargoes, he said.
Just earlier into Q4, some buyers had been "managing" contract volumes to effectively take less, reducing their near-term loading requirements as global steel demand fell.
Spot volumes had been on offer, with SSI UK's distressed cargoes recently finding homes at what was understood to be vastly reduced premiums against contract levels.
The direct reduction pellet market may see more of a tightening.
DIRECT REDUCTION MARKET
Samarco was one of three to four key global DR pellet suppliers, and with Voestalpine's Corpus Christi HBI plant coming onstream soon, any long-term deficit in DR pellets may hit buyers in the Middle East, North Africa and North America harder than in blast furnace pellets markets.
LKAB is due to start shipping DR pellets to Texas next quarter, a earlier company statement said.
Samarco's impact on China is so far being shrugged off.
Platts weekly China spot pellet premium dipped $0.50 this week to $13.50/dmt, as demand for pellets overall is low when lump is far cheaper and steel prices and margins remain pressured.
A stockpile said to have built up in Qingdao port with 1 million mt of Samarco pellets following recent heavy import volumes remains available, with limited buying appetite.
"No one is buying for a while, nothing has changed," a source said of the Samarco spot material in China.
A contract buyer sums up Samarco's situation as terrible for the local community with potential changes to mining permitting and regulations in Brazil, but not a huge market event.
"There is no reason for premium to go up. DR may see a bigger impact," he said.
"The correction may be lower, but still we'll see downside."
