No “upwards pressure” on iron ore from Samarco

From Macquarie:

The tragic and catastrophic dam failures at Samarco’s Minas Gerais operation on Thursday are a reminder that no matter how bad market fundamentals may be, there are things which are much more important.

 Very much a secondary concern to the human and environmental impacts is the consequences for the global iron ore market…Samarco currently produce ~30mtpa of pellets from 4 separate pellet plants at UBU port in Espirito Santo state in Brazil…So any disruption is not insignificant. However, in terms of the price setting market, shipments from Samarco to China annualise only 9mt despite doubling this year, representing less than 1% of Chinese consumption. China has a distinct preference for manufacturing its own pellets from a combination of imported and domestic pellet feed. With pellets being the most expensive form of iron ore charged to the blast furnace, they are also losing favour in a Chinese industry which needs profitability much more than productivity. With Chinese steel output falling, we don’t expect to see any upward pressure on the iron ore price from a Samarco outage.

 Should the outage last until mid next year however, which to us seems a minimum, there is some impact. In a world where Chinese iron ore demand is essentially flat (at best), we currently model that 61mt of existing iron ore needs to be displaced during 2016 to accommodate ramp ups from new low cost supply – notably Roy Hill. All other things being equal, this figure would reduce to ~30mt should the Alegria mine for Samarco still be offline during this period. This potentially eases some pressure on the smaller listed players, though it should be noted we are still looking at a market with more than adequate supply capacity.

More or less my own thoughts.