Iron May Get Support as Brazil Disaster Jolts Pellet Market

Updated on
  • Taking supply from market will give boost, Kirchlechner says
  • Dam failures at BHP-Vale venture may disrupt pellet supplies

Iron ore prices, which are headed for a third year of losses amid a global glut, may get a lift after tailings dams in Brazil owned by two of the world’s biggest miners collapsed.

The impact will probably be most pronounced on pellets, the product made by the Samarco Mineracao SA venture owned by BHP Billiton Ltd. and Vale SA, according to Philip Kirchlechner, director of Iron Ore Research Pty. Other prices, including fines, or the granules of ore sold to China, may also rise in a knock-on effect, he said.

“Because it’s an iron ore product, simply taking iron ore supply out of the market will generally provide a boost,” Kirchlechner, former head of marketing at Fortescue Metals Group Ltd., said by phone on Friday as the full extent of the disaster, including fatalities, remained unclear. “It would affect the general price index for fines, but it will specifically affect both the pellets and lumps premiums more.”

Iron ore -- the raw material that’s used to make steel -- is produced and shipped in different forms, and pellets are small balls made from the powder generated during the ore extraction, according to Vale’s website. Samarco produced about 25 million metric tons last year, mostly pellets, out of a global export market estimated by Rio Tinto Group at about 1.7 billion tons. Pellets typically trade at a premium to fines, and CRU Group Senior Consultant Adrian Doyle said on Friday that differential may now widen.

Samarco Operations

The Samarco operations include mines, a concentration plant, two pellet plants, port facilities and a pipeline between the mine and the pellet plants, according to BHP’s website. The venture supplies pellets to about 20 countries, with dominant markets in the U.S. and Europe, according to AME Group. BHP Chief Executive Officer Andrew Mackenzie told reporters Friday the full extent of the damage would become clear at daybreak.

“There will be some steelmakers that will depend on pellet supply from Samarco,” said Kirchlechner, who’s also a former chief iron ore representative for Rio in Shanghai. “If they cannot get it they’ll have to use something else.”

Iron ore fines with 62 percent content delivered to Qingdao fell 1 percent to $48.21 a dry ton on Friday, taking losses this year to 32 percent, according to Metal Bulletin Ltd. The price of 65 percent content blast furnace pellets delivered to the same Chinese port fell 2 percent to $67.92 a dry ton on Nov. 6, according to weekly data from Metal Bulletin.

Major Exporters

“If there’s a significant disruption then we could see an increase in the pellet premium,” said CRU’s Doyle. The world’s major pellet exporters have an annual seaborne trade of about 110 million tons, of which Samarco contributes about 20 percent, according to researcher CRU. “Although they are not a huge player in the market, it’s much tighter than the fines market,” Doyle said.

Iron ore has plunged as low-cost supplies from Brazil and Australia surge just as steel demand sags in China. Rio de Janiero-based Vale is the world’s largest iron ore producer, while BHP and Rio are the top shippers from Australia followed by Fortescue. BHP has forecast prices will decline for years.

Shares of Ferrexpo Plc, a iron ore pellet producer in Ukraine, jumped 4.7 percent in London trading.

Caue Araujo, iron ore industry director at AME in Sydney, didn’t see a significant impact on the global market from the disaster in Brazil.

“Unless there’s a stoppage for a significant period, I can’t see this having an impact,” on benchmark prices, Araujo said on Friday. Still, any disruption may help support the current premium for pellets of about $30 a dry ton above the benchmark price, he said.