Australian iron ore mining firms are ready to ramp up production if Covid-19 related disruptions in Brazil create the right market conditions and if trade tensions with China do not dampen demand.
Australian iron ore exports increased by 6pc in January-March form a year earlier, according to the Australian Bureau of Statistics. The increase partly arose from the smaller impact of Cyclone Damien compared with Cyclone Veronica in 2019, but also because mining firms have greater capacity to respond to market opportunities after a series of debottlenecking investments made in the wake of the tailings dam failures that forced mine closures in Brazil from early 2019.
BHP, Rio Tinto, Fortescue Metals and Roy Hill all undertook low cost debottlenecking through 2019, designed to strike a balance between not oversupplying the market and being ready to increase exports if Brazilian mines were out for longer than expected.
Some Brazilian mines have reopened after working on their tailings dams, but concern is growing that the country will be forced to go into lockdown as it becomes a coronavirus hotspot, overtaking Germany in the number of confirmed cases.
This could provide an opportunity for Australian mining firms to ramp up exports, as long as they remain on the right side of their major customer, China.
Canberra's push for an inquiry into the handling of the early stages of the Covid-19 outbreak in China has soured relations with Beijing and has been linked to a threat to impose tariffs on Australian barley and boycott some Australian beef processors. Beijing and Canberra point to pre-virus disputes, but the timing has raised questions about China's desire to use trade to punish Canberra.
The Minerals Council of Australia chief executive Tania Constable met with China's ambassador to Canberra last week to make the case for resources exports, but most analysts expect the iron ore sector to be fairly safe particularly as China has very little alternative to the low-cost high-grade iron ore exported from Western Australia. The same may not be true for coking coal exports, where China has alternate supplies.
Swiss bank UBS this week changed its recommendation on BHP to a buy, based on its expectation that iron ore prices will remain above $80/t cfr China for 62pc Fe for the rest of 2020, amid disruption in exports from Brazil and South Africa.
BHP is on track to come in at the top of its guidance of 273mn-286mn t for the year to 30 June, after its October port maintenance increased throughput, and is starting to mull a target of 330mn t/yr. Rio Tinto had a difficult January-March during Cyclone Damien, but has ramped up shipments in April and early May that are paving the way for a strong second quarter. Fortescue increased its guidance to 175mn-177mn for the year to 30 June, from 170mn-175mn last month. Roy Hill is awaiting approval to expand its capacity to 65mn t/yr, as they ramp up to 60mn t/yr from 55mn t/yr at the start of 2020.
