Severe flooding in southeast Brazil over the weekend and the coronavirus outbreak in China are clouding the market outlook on the seaborne iron ore market.
Seaborne iron ore markets began 2020 with a supply deficit, but the Wuhan virus crisis could reduce that deficit if it delays construction restarts in China this spring. That possibility led traders to short on the SGX and Dalian commodity exchange last week to hedge physical cargoes, a trend that has accelerated this week.
SGX prompt-month 62pc Fe fines futures fell by $5.84/t to $85.19/t yesterday and by another $1.51/t to $83.68/t today. This is down by 11.3pc from $94.35/t a week earlier. A slowdown in China's steel demand could reduce its imports of more than 1bn t/yr of iron ore fines, lump and pellet.
But low liquidity during China's week-long lunar new year holiday could exaggerate price moves in paper markets. During the 4-8 February 2019 holiday, prompt-month 62pc paper jumped by $8.75/t, or 10.5pc, to $91.85/t, over two days before losing most of those gains. The market then was sizing up potential supply shocks after Brazilian mining firm Vale's 25 January 2019 tailings dam accident in Minas Gerais, Brazil. In 2020, the market is facing questions not only on demand but also supply.
Vale's dam accident reduced 60mn t/yr of Vale's southern system supplies of pellet and 62pc Fe high-silica fines.
Brazil's southeastern state of Minas Gerais was hit by its worst rains in at least 110 years for a 24-hour period on 23-24 January. Flooding and landslides this weekend could further extend supply cuts. Seaborne 62pc Fe iron ore prices rose to 2019 highs above $125/dry metric tonne (dmt) in July, mainly driven by Vale's supply cuts.
Brazil's October-March rainy season has already slowed Vale's northern system output, lifting spot premiums for 65pc Fe IOCJ and 63pc BRBF fines.
Vale blends southern system fines with northern system 65pc Fe IOCJ fines for BRBF fines blended in Malaysia and China. Vale expects its 2019 shipments to fall to 307mn-332mn t from 384mn t in 2018.
Australian iron ore supply has not made up for the shortfall.
Western Australia's iron ore shipments started 2020 at a three-month low as a result of a conveyor belt fire and heavy rains from Cyclone Blake. A fire at UK-Australian mining firm Rio Tinto's Cape Lambert facility sent its shipments in the week to 18 January to the slowest pace since March when Cyclone Veronica forced it to declare a force majeure.
Vale's production recovered to 345mn-355mn t/yr in October, but shipments have fallen on weaker output from its southern and southeastern systems, US bank Morgan Stanley said last week. The rainy season will reduce its northern system output, and India's iron ore mine auctions could reduce its net exports by 7mn t in 2020, the bank said. China will need 20mn t more of iron ore in 2020, it said.
Seaborne iron ore markets could face a deficit of 41mn t in 2020, US bank Goldman Sachs said last week before the virus outbreak gained momentum. The bank's forecast was based on still-strong Chinese demand with activity picking up after the lunar new year holiday, but the forecast could be in doubt now that the virus outbreak has pared market outlooks.
