Vale to suspend operations at iron ore mines: Update

Adds analysts, market reaction and background

Brazilian mining company Vale will remove around 10pc of its annual iron ore output capacity as it decommissions 10 tailings dams at various mines in the next three years, after an accident at the Feijao mine left 65 people dead and 279 missing in Minas Gerais province.

The total loss of production from the suspension of operations is expected to be around 40mn t/yr, including 11mn t/yr of pellet output. The decommissioning of the dams will cost around $1.3bn.

Vale said it will increase production at other mines to make up for loss of output but did not give details. Vale is currently raising production at its 90mn t/yr S11D complex in the Carajas region. Vale estimated output of 390mn t of iron ore in 2018.

Vale will temporarily halt the production of the units where the dams are located, which are the Aboboras, Vargem Grande, Capitao do Mato and Tamandua operations in the Vargem Grande complex and the Jangada, Fabrica, Segredo, Joao Pereira and Alto Bandeira operations in the Paraopeba complex. The fatal dam burst on 25 January was at the Feijao mine that is part of the Paraopeba complex. Work will also be stopped at the Fabrica and Vargem Grande pelletising plants. The operation of the halted units will be resumed as the decommissioning works are completed.

Both the Paraopeba and Vargem Grande complexes are part of Vale's southern system mines, which produce high-silica medium-grade fines such as SSFG and SSFT fines. Vale has said over the past year it plans to reduce production of these fines as it ramps up output of high-grade ore in the Carajas complex. The southern system fines are blended with the 65pc basis Vale IOCJ fines to produce the BRBF fines, a best-selling medium-grade ore in the Chinese market.

Vale's mine closures lifted prices of portside iron ore and futures in China. The most active Dalian iron ore futures contract was higher by around 6pc AT 12.14pm Singapore time (04:14 GMT). Offers for PB fines were at 605-630/wet metric tonne (wmt), or a $80-83.35/dry metric tonne seaborne equivalent, in the morning, up by Yn40/wmt from yesterday's offer prices. Deals for PB fines were done at Yn605/wmt, Yn615/wmt and Yn620/wmt at Caofeidian port.

Brazilian public prosecutors ordered the arrest of five people involved in licensing Vale's Corrego do Feijao tailings dam that ruptured last week. Authorities are investigating whether the technical documents used to certify the dam's safety were fraudulent. Vale is co-operating with investigations, the company said. An additional $215mn in Vale assets was frozen by the department of labour, in addition to $2.65bn that has already been frozen earlier by the Minas Gerais public prosecutor.

A securities class action lawsuit has been brought against Vale in a New York district court alleging the company provided false and misleading information about the risks and potential damage of a potential breach in Feijao dam. "Vale intends to defend vigorously against the claims," the company said.

Short-term price increases

Vale could quickly bring idle and new capacity on stream to minimise production losses at the southern system mines, said analyst reports by investment banks Goldman Sachs and Morgan Stanley.

Goldman Sachs forecasts a 10-15mn t/yr net loss of Vale's output while Morgan Stanley expects any production loss to be minimal. But both expect an upside to iron ore prices in the short term as a result of Vale's decision today. Goldman Sachs has revised its three- and six-month price forecasts for 62pc basis fines at $80/dmt and $70/dmt from an earlier forecast of $70/dmt and $60/dmt respectively. Iron ore prices may remain high for a few quarters as a result of Vale's decision, said Morgan Stanley.

Both investment banks said any price upside for pellet may be sharper as it will be difficult to replace the 11mn t/yr capacity to be shut down temporarily. The suspended capacity represents around 10pc of the seaborne pellet market, which could see pellet premium test September highs of a $90/dmt premium to the 62pc reference fines index, said Goldman Sachs. The price upside for pellet may persist longer than that for other ores, said Morgan Stanley.

Low alumina iron ore supplies will fall by a large extent in the Chinese market, which could support demand for such fines if steel mills' profitability and demand for quality ores improves in the spring months, said a Beijing-based trader.

Prices of low-alumina, 63pc basis BRBF fines had increased sharply from mid-2018 before easing back since November as steel mill appetite for premium ores cooled. Vale had blended 75mn t BRBF fines in China in 2017 and planned to blend around 100mn t in 2018, although there is no update on actual volumes yet. A cargo of BRBF fines was offered at Yn680/wmt at Rizhao port, higher by Yn60/wmt from yesterday's traded price, at the same level as price of 65pc basis IOCJ fines last week.

BRBF fines supplies will be affected with lower availability of southern system fines. The price upside will be more for low-alumina ores such as Trafigura fines, CSN fines and Mauritanian ores and less for PB fines and Newman fines, said a south China-based trader.

The proportion of BRBF fines in the furnace burden is typically less than 15pc in Hebei and Shandong provinces, although it higher than 20pc in Shanxi and south China, said the manager of a Hebei-based mill, adding mills could switch to using more Australian ores if BRBF fines prices rise too much. A large international trading firm reported substantial BRBF fines stocks in portside markets, which it now expects to sell at a higher price in the short term.

Enquiries for Vale's low-alumina SFLA fines also increased with a February delivery cargo offered at $9/dmt premium to the March 62pc index.

Prices of Indian pellet are expected to be firm in the short term though ample portside stocks may curb upside, said the manager of a Hong Kong-based international trading firm. Indian 64pc Fe pellet is the most widely traded in China's spot markets. Prices have fallen to around $109-110/dmt cfr China from highs of $150-160/dmt in September and October. Pellet demand remains robust in India, which will definitely push up export prices if Chinese demand increases in the short term.

"A lot of the price movement in iron ore we have seen this morning is speculative. If steel prices do not follow the increase in iron ore prices, mill profits will be squeezed further which will pressure iron ore prices," said a Shanghai-based trader.

Additional supplies from Anglo American's Minas Rio mine, which was reopened this month, as well as from Vale's Carajas mines will largely plug any supply deficit from the affected mines, so seaborne supply and demand may remain in balance this year, said a Shanghai-based trader.

Accident summary:

• Dam I of the Corrego do Feijao Mine in Brumadinho, Minas Gerais in southeast Brazil was breached on 25 January. The death toll has risen to 65 with hundreds missing.
• The dam had been inactive for three years and was being planned for decommissioning.
• The height of the dam was 86m and had a crest length of 720m. It held 11.7mn m³ volume of upstream mining waste, mostly silica and water, with no pond associated with it.
• The dam was built in 1976 by Ferteco Mineracao and acquired by Vale in 2001.
• The dam had stability condition statements issued by geotechnical firm TUV SUD do Brasil in June and September 2018 for its periodic safety reviews. Biweekly inspections were reported to regulators with the last inspection in regulator's records for 21 December, with two inspections in Vale's system for 8 January and 22 January.
• The Minas Gerais public prosecutor's office froze $2.65bn of Vale's assets after the accident.
• This dam accident follows the 2015 Samarco mine spill that was the country's worst environmental disaster and killed 19. Courts have not yet set final penalties for the Vale and BHP joint venture.
• Vale's Paraopeba mining complex has 13 dams and structures with three at the Feijao mine.
• The Feijao mine produced 7.8mn t in 2017 and 8.5mn t in 2018 out of a total 26.3mn t and 27.3mn t by the Paraopebas complex.

Other market views:

• Vale has around 30mn t of iron ore inventories in China and Malaysia, which should alleviate short-term supply stress, Goldman Sachs said.
• Anglo American's Minas Rio mine that started operations last month "could be affected" and Samarco "is unlikely to restart in the foreseeable future", Goldman Sachs said.
• The Minas Rio restart might add 19mn t/yr to seaborne markets to help balance markets, a Shanghai trader said.