No reprieve - iron ore glut defies Samarco dam disaster

By Manolo Serapio Jr and Maytaal Angel MANILA/LONDON (Reuters) - Premiums for iron ore pellets - the highest-quality steelmaking raw material - have sunk this month despite the loss of a fifth of global supplies after a Brazil mine disaster, underscoring the industry's deep glut. Even a permanent closure at the flood-hit Samarco mine would be unlikely to boost pellet premiums, analysts and traders said, with other miners able to boost supply and Chinese steel mills eager to cut costs by using cheaper ore. "It's probably the least sensitive time for a supply issue," said Mark Pervan, global head of commodity research at ANZ. Iron ore prices <.IO62-CNI=SI> have tumbled nearly 40 percent this year, hitting a decade low at $43.40 a tonne on Tuesday on oversupply and falling Chinese steel demand. The premium that steel mills pay for pellets has also been falling, and has continued to slide since a tailings dam owned by Samarco burst on Nov. 5, unleashing 40 million cubic meters of mud on the valley below and killing 11 people with 12 still missing. Samarco, jointly owned by BHP Billiton and Vale SA , produces between 25-30 million tonnes a year of iron ore, mainly pellets, selling to China, Europe, the Middle East and Japan. The premium for iron ore pellet for delivery to China fell to $12.25 per dry metric tonne as of Nov. 18, continuing a steep decline from early October when it stood at $19.30, according to pricing agency Platts. Voluntary output cuts in other industrial commodities have had little impact. A pledge by major Chinese zinc smelters to slash nearly 20 percent of total production next year had a short-lived boost to prices that are still near multi-year lows. 'THINGS ARE THAT BAD' "If there was ever an excuse for prices to rise it would have been now, but things are that bad that the market brushes this news aside," said a London-based trader on the Samarco disruption. Pellets, processed ore that can be fed directly to a blast furnace, are a high-end product and make up only a tiny proportion of the seaborne iron ore trade. China imported 19 million tonnes last year, or 2 percent of its total purchases, according to commodity consultancy CRU. Widening losses among Chinese steel mills has prompted them to look to cheaper ore, cutting costs despite reduced productivity, said a Singapore trader. "Mills that are under long-term contracts with Samarco will be quite happy to see Samarco stop supplying," said a Shanghai-based trader. Outside China, Japan's biggest steelmaker, Nippon Steel and Sumitomo Metal Corp <5401.T>, has secured alternative suppliers, a spokesman said, but declined to give details. Japan's second-ranked JFE Steel <5411.T> declined to disclose backup plans. Vale could ramp up pellet production from other mines to fill any gap arising from Samarco, while other suppliers such as Russia's Metalloinvest [MTALI.UL] and Bahrain Steel could bridge any shortfall, said Mitchell Hugers, analyst at BMI Research. Officials at BHP Billiton and Vale declined to comment. Several attempts to contact Samarco were unsuccessful. (Additional reporting by Yuka Obayashi in Tokyo, Krishna Das in New Delhi, Meeyoung Cho in Seoul and Stephen Eisenhammer in Rio de Janeiro; Editing by Richard Pullin)