Sizing up Covid-19 iron ore supply risks

Author Chris Newman, Ferrous Markets senior editor

The centre of the Covid-19 pandemic is shifting from Europe and the US to countries like India and Brazil, two of the four largest iron ore exporters in the world. Iron ore prices are rising as the focus moves to saving lives.

The ICX 62pc fines index rose by $4.25/dry metric tonne (dmt) to $100.75/dmt cfr Qingdao on 29 May, and the 65pc index rose by $4.30/dmt to $116.90/dmt after Minas Gerais labour officials asked a court to halt operations at Vale's Itabira complex until workers could be tested for Covid-19.

The courts ruled in Vale’s favour and set an 18 June hearing after labour officials contested the decision.

Brazilian mining firm Vale can hardly afford disruption. It has struggled to recover from a January 2019 dam accident and wet weather that cut its production by a fifth to 302mn t in 2019. Now the rapid spread of virus could bring lockdowns and more disruptions. Vale was forced to halt its Malaysia iron ore blending terminal for nearly two months during the country’s lockdown.

Brazil daily virus cases and China iron ore prices

Vale’s guidance has 15mn t of virus impact. The lower end of Vale's guidance of 310mn-330mn t iron ore fines output in 2020 includes 15mn t of Covid-19 impact. But Brazil’s virus cases are growing rapidly, making it the new centre of the Covid-19 pandemic. It reported 33,274 new cases and 956 deaths on 30 May.

Cases near Vale operations risk more lost tonnes and delays to mine restarts. Vale still requires permits to restart 6mn t/yr at Brucutu and 5mn-6mn t/yr at Fábrica, Timbopeba and Vargem Grande operations for its 2020 guidance. It expects to finish a slurry pipeline at Timbopeba and a single-step dam at Vargem Grande by the end of the year, and is reinforcing dams at Brucutu and Fábrica.

Vale production guidance


  mn t
  Adjustments Target
     
Original   355.0
Q1 production miss -8.0  
Q2 Northern restrictions -3.0  
Timbopeba/Fabrica delays -7.0  
Brucutu at 80% 2H -6.0  
Upper range   330.0
Brucutu at 40% 2H -6.0  
Potential Covid-19 impacts -15.0  
Lower range   310.0
Source: Vale  


Itabira at 36mn t was 12pc of Vale's total output in 2019.
The guidance did not foresee large-scale shutdowns of operating mines, and neither did many Chinese market participants. "If the operations stopped in this area, iron ore prices might jump to $150/dmt in the coming months. Itabira is a key producing area for Vale. The impact to the whole iron ore supply chain would be enormous," a Beijing-based iron ore market participant said.

Vale iron ore production and sales

        mn t
  Q120 2019 2018 Pc change
         
Northern System        
Northern and Eastern ranges 21.5 115.4 135.6 -14.9
S11D 18.4 73.4 58.0 26.4
Total 39.9 188.7 193.6 -2.5
Southeastern System        
Itabira (Cauê, Conceição and others) 6.0 36.0 41.7 -41.9
Minas Centrais (Brucutu and others) 3.6 25.9 36.0 -28.1
Mariana (Alegria, Timbopeba and others) 2.1 11.3 26.7 -57.6
Total 11.8 73.1 104.4 -29.9
Southern System        
Paraopeba (Mutuca, Fábrica and others) 3.6 36.0 41.7 -41.9
Vargem Grande (Vargem Grande, Pico and others) 3.7 25.9 36.0 -28.1
Total 7.4 37.7 84.1 -55.2
Midwestern System        
Corumbá 0.6 2.4 2.5 -4.0
Total fines production 59.6 302.0 384.6 -21.5
Total fines sales 51.7 269.3 309.0 -12.8
Total fines and pellet sales 59.0 312.5 365.6 -14.5
Source: Vale      


Steel production cuts are cushioning lost supply.
Ex-China global steel output fell by 28pc in April from a year earlier. Qatar, among the sharpest declines, saw output down by 74pc, India down by 65pc, the US down by 32pc, and the EU, CIS and Japan all down by 23pc. This was as China's largest steelmakers raise output to near record levels.

Steel production cuts in Europe, South Korea and Japan could divert 4mn-5mn t/month of iron ore to China. The EU would account for 500,000-600,000 t/month of high-grade Atlantic pellet to China after it shed about a fifth of its 87mn t/yr hot metal production. That would free up 15mn t of iron ore for China this quarter.

Europe, Japan and South Korea imported about 300mn t of iron ore in 2019.

Iron ore exports from key countries

          mn t
  2019 2020 f 2021 f 2022 f 2025 f
           
Australia 836.2 892.2 907.3 938.2 1032.5
Brazil 472.9 451.2 453.4 449.0 447.3
Ukraine 38.2 36.4 36.6 36.2 36.1
India 34.6 33.1 33.2 32.9 32.8
World trade 1759.7 1775.4 1795.0 1817.1 1908.2
Source: OCE          
f = forecast        

Brazil accounted for 27pc of 1.8bn t of global seaborne iron ore supply in 2019, and for 21pc of China's 1bn t of iron ore imports in 2019. Australia was China’s suppliers at 62pc of imports.

The ICX index last year surged by 74pc to exceed $125/dmt cfr Qingdao in July after seaborne markets lost more than 100mn t/yr of supply from Brazil and Australia.

Chinese port inventories slipped to a new three-year low last week of 108mn t, down by 13.6pc this year, as a second year of supply disruption hits.

A cyclone in February in Western Australia closed all iron ore ports in the Pilbara region, reducing February shipments to an 11-month low.

Western Australia iron ore shipments

Australia's iron ore shipments have rebounded. Shipments from its four largest mining firms in the week to 23 May rose to the highest level since the end of June 2019.

Australian producers are expanding capacity and lifting guidances:

  • 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. It is also starting to mull a target of 330mn t/yr.
  • Rio Tinto had a difficult January-March but ramped up shipments in April and early May that are paving the way for a strong second quarter. Its 2020 shipment guidance of 324mn-334mn t is up from 327.4mn t shipped in 2019.
  • Fortescue increased its guidance to 175mn-177mn t for the year to 30 June, from 170mn-175mn in April.
  • 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.

A potential risk to Australian supply is the decline in Australia-China relations after Canberra supported an independent inquiry into the Covid-19 outbreak. Beijing has taken action against Australian barley, beef and wine and has its sights on Australian thermal and coking coal.

But China's dependency on Australia should insulate iron ore from the dispute, especially as Covid-19 risks mount for Brazil. China acknowledged as much last month when it streamlined inspections to speed through mainstream iron ore cargoes. China knows it has no room to manoeuvre.

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