Brazilian iron ore miner Samarco may be out of iron ore pellets within  three weeks following a fatal tailings dam collapse last week, a source  familiar with the company said Monday.

An indefinite stoppage could affect global pellet markets, market sources said.

Operations in Minas Gerais were halted Friday, while pipelines would  have moved the remaining iron ore concentrate down to Ponta Ubu by  Monday, the source said after speaking with company employees.

"It will take a minimum three months to remove the mud and check the other dam," he said.

Stocks said to total 1.3 million mt from the 1.8 million mt-capacity  yard may be shipped in two weeks, leaving a week's worth of fresh  pellet production as the remainder to be shipped, along with any other  materials on site that may be processed and loaded, he said.

Ubu Port has shiploaders rated at over 9,000 mt/hour and receives  and unloads anthracite and other coals used in the pelletization  process, according to Samarco.

With the collapse of the Fundao dam last week, and the Santarem dam  also affected, it would take three months to clear the sludge and assess  whether the third Germano dam was usable, the source said.

"No one knows the current situation on the dam," he said.

The Cava de Germano structure in the same network is formed from the  depleted mine and is said not to have the capacity to take tailings.

The fastest way for Samarco to return to production would be for  Vale to allow the use of its nearby sludge dam, and to gain access to  new water supplies for the necessary reverse flotation beneficiation  process, he said.

Samarco has an annual production capacity of 30.5 million mt of  pellet and 32 million mt of ore concentrate. In 2014, Samarco's  production was 25.075 million mt.

Samarco's disaster will "change the market quite a bit," an iron ore  buyer for a mill said. "The company accounts for around one-quarter of  seaborne pellet trade, so there can be expected some major impact."

Pellet premiums may get support as a result, despite contract  premiums likely still due to fall next year due to weak global steel  demand, he added.

The accident will limit Samarco's capacity heavily, and Brazilian  authorities will be involved and would want to check everything, he  added.

SPOT AVAILABILITY MAY DECLINE

The direct effect on the burgeoning Chinese import pellet market may  be limited as lower iron grades may be easily transferable, but the  spot market will dry out, the buyer source warned.

Buyers in Europe and elsewhere will look for alternatives from Vale,  LKAB, and Rio Tinto's Iron Ore Company of Canada, and material will  sell out, the source said.

Samarco's direct reduction (DR) pellet market share is larger, so that sector may be even more affected, sources said.

Nucor has reduced seaborne purchases, while Metalloinvest has come  onstream with a new pellet plant capable of DR grades, and Bahrain Steel  is more active in securing pellet feed for its single operational DR  pellet unit. This may help balance any shortfall.

A second 5.5 million mt unit remains shut, which may be able to  restart with sufficient demand, although another source was not so sure  the long-idled plant could come back so quickly.

A Persian Gulf-based mill source said Samarco accounts for one-third  of DR pellet supplies, but there were alternatives at hand. Bahrain  Steel may be able to ramp up DR pellet output to fill the gap, he said.

As for Vale, Samarco's parent company and the world's biggest pellet  producer, the company does not, in the short term at least, have the  ability to supply the shortfall, a company source said.

Vale could raise production, but it would be marginal compared to Samarco's 30 million mt/year, he added.

Reactivating the Tubarao I and II pellet plants is not likely as a short-term option, the source said.

The unit were halted for three years and it may take at least two to  three months to restart, and any decision would depend on market  conditions. There is also a need to analyze if there is room in the  stockyard for this additional volume, the Vale source added.

According to Vale, the market as a whole is not prepared to supply this volume, if lost.

It would be easier if it was blast furnace pellet, but DR grade is  more difficult to find sources. There may be some incremental increases  from Ukraine and Russia, but the quality may not match every buyer's  needs.