OREANDA-NEWS. November 20, 2015. Brazilian iron ore miner Samarcos tragic accident and environmental disaster has left a hole in the pellet market, but buyers may not be scrambling for alternatives. The effect on pellet premiums, however, may be helping buttress a sagging market.

Premiums will fall next year, but perhaps not by the same degree on account of Samarcos accident, echoed two pellet buyers.

Platts assessed November Atlantic estimated contract premiums at \\$30/dmt. Prior to the accident, sources expected a fall in premiums, with buyers indicating a settlement in the mid-\\$20s/dmt for 2016 with some suggesting perhaps a drop to the low \\$20s/dmt may be appropriate based on what some said was the loosest pellet market in many years.

Iron ore pellet premiums had been on a downward path through the second half of 2015, and Samarcos suspension, on capacity rated at over 30 million m t/year, left markets looking for reactions from participants. Various parties state three months as the minimum time frame exports may possibly come back into the market, with more open-ended worst-case scenarios.

Buyers, mainly in Europe, the Middle East and some in Asia, will ensure they have sufficient cover over the first and second quarters of 2016, and may be revisiting other suppliers to bring forward contracted deliveries or use options to snag extra cargoes.

Just earlier in 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 UKs distressed cargoes finding homes at what was understood to be vastly reduced premiums against contract levels.

With low prices for steel and scrap and weaker utilization rates, demand for pellets had tailed off. Pellets are used to boost efficiency in the production process of steel and cut waste.

The direct reduction (DR) pellet market may be more a wild card.

Samarco was one of three to four key global DR pellet suppliers, and with Voestalpines Corpus Christi DRI plant coming on stream 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.

Swedens LKAB is expanding, and Vale may be able to increase DR pellet ratios at its plants, but many are tied to supplying BF grades to steelmakers in Europe and Asia. Vales 9 million mt/year Oman pellet plant has already ramped up. Bahrain Steel may help step in, as could Metalloinvest, given both have pelletizing capacity that could be turned to more DR grades.

DRI (direct reduced iron) trends for those mills tied to using seaborne pellets are a mixed bag. Lower output in Egypt was blamed on natural gas availability, undermining some industry expectations this year, and the US and Trinidad slowed output recently, with cheap steel imports hot on the heels of Persian Gulf producers long-term ambitions to operate at steady rates following a string of investments. Iran is looking to import more, and could contribute to further tightness.

Samarcos impact on China is so far being shrugged off.

Platts weekly China spot pellet premium dipped \\$0.50/dmt during the week of Nov. 9 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 Samarcos 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 well see downside.