Iron ore may see sharp gains as Vale concerns mount
China's iron ore prices are expected to make sharp gains over the next few days, as additional supply cuts to Vale's iron ore production during the 4-10 February lunar new year holiday fuel the bull market.
The most-active iron ore contract on the Dalian Commodity Exchange closed limit-up, higher by 7.95pc. Deals for PB fines have been reported at 680 yuan/wet metric tonne (wmt), at a seaborne-equivalent of $90.30/dry metric tonne (dmt), at Qingdao port, higher by 9.14pc from the Argus-assessed price of Yn623/wmt, which last changed on 1 February. PB fines deals were done at Yn685/wmt in Tangshan ports. Sellers are offering BRBF fines at Yn700-710/wmt, up by Yn40-50/wmt from the previous assessed price of Yn660/wmt.
Vale had been ordered by a court last week to stop operations at its second-largest 30mn t/yr Brucutu iron ore mine, following a tailings dam accident at the Feijao dam in Minas Gerais province on 25 January that killed over 150 people.
The company has also voluntarily decided to gradually suspend production of around 40mn t/yr of iron ore output in Minas Gerais, as it shuts down its 10 remaining tailings dams over the next one to three years. After the Brucutu shutdown last week, Vale declared force majeure on unspecified volumes of pellet and iron ore contracts. Vale has also been asked to shut down its wastewater treatment plant at the Tubarao port, affecting its pellet-making plants.
Vale has so far halted operations at the Vargem Grande, Feijao and Brucutu mines, totalling 51mn t/yr of iron ore output, according to an analysis by Morgan Stanley, while 15mn t/yr pellet capacity has been closed.
"I think the 62pc fines prices may hit $100/dmt in the near term. There are concerns of further action by the Brazilian government in the aftermath of the disaster, which may further hit iron ore production," said an east China-based trader. "PB fines will be the biggest gainer of any shortfall in BRBF fines supply." The Argus ICX 62pc seaborne fines price was last assessed at $88.35/dmt on 8 February. The ICX price has been unchanged since 1 February.
BRBF fines is Vale's best-selling medium-grade product in the spot seaborne and portside markets, valued for its low-alumina content. Shortage in the supply of the product, a blend of IOCJ fines and southern and southeastern system fines such as SSFG and SSFT may drive buyers to seek Australian iron ores such as PB fines, Newman fines and Mac fines, according to an analyst report by China Merchant Securities, with low-alumina domestic concentrates also likely to be sought after.
Vale may be able to increase output at its northern mining complexes to partially meet supply shortages from Minas Gerais, but Vale's production is likely to be lower by 50mn t in 2019 compared with 2018, said an analyst report by Guotai Jinan Securities. "We expect global iron ore supply to fall by 35mn t in 2019 and iron ore prices will be strong," it added.
"Sellers are in no hurry to offer cargoes since they sense $100/dmt prices on the horizon," said a Singapore-based trader.
Higher prices of iron ore may prompt more iron ore production at Chinese mines and non-mainstream output, although the extent and speed of these ramp-ups are difficult to estimate.
The sharp price gains today were driven by expectations of a supply reduction, while spot transactions were not that active. Buyers are not keen to enter the bullish market on the first day after the holiday and may wait to see if the price increases persist. "There is a big possibility of prices hitting $100/dmt. But our mill will still keep using existing stocks until it becomes clear that the price upside is here to stay," said the manager of a Hebei-based mill.
Vale's force majeure on shipments did not affect Chinese supplies and were mostly for customers in the EU, US and Japan, said the manager of a south China-based mill. Chinese iron ore buyers that Argus spoke to did not receive any force majeure notices from Vale.
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