Top iron ore producer Vale’s decision to decommission its upstream tailings dams following the deadly dam burst Friday at its facility in Córrego do Feijão, Brazil has lit a fire under iron ore prices.
The Chinese import price of 62% Fe content ore jumped 5% on Wednesday to trade at $82.53 per dry metric tonne according to data supplied by Fastmarkets MB. The price of the steelmaking raw material is now up more than 13% year to date. The index price for high-grade (65% Fe) Brazilian ore gained $5.40 to $97.60 a tonne.
Domestic Chinese prices also surged, with the most actively traded iron ore futures contract on the Dalian Commodity Exchange hitting its daily uplimit to finish Wednesday nearly 6% higher at 587 yuan ($87.40) per tonne, a 17 month high.
Vale’s plans to halt production at 10 operations cutting its annual output by some 10% or 40m tonnes, upending a market that was expected to experience a year of gentle decline.
BMO Capital Markets, a Canada-based investment bank, says 2019 “has gone has gone from a year where we were looking to displace marginal tonnes to one where we will need to incentivise additional higher cost material:”
While Vale can make up some of the tonnes from other operations, BMO now forecasts the need for an additional 20m tonnes of such supply this year, as opposed to its previous analysis of 10m tonnes of ore being displaced:
“Iron ore remains an efficient market, and higher prices should bring this to market quickly. We expect an outsized spot reaction in the short term as the market adjusts to the lack of tonnes, before a moderation as equilibrium is reached towards mid-year.”
BMO raised its forecast for benchmark prices by 24% to $78 per tonne from $63 per tonne previously and its 2020-2021 price to $70 a tonne.
A similar disaster three years ago at Samarco, a Vale-BHP joint venture, in the same region of Brazil halted output and the Brumadinho disaster has made a restart at the pellet production plant less likely.
BMO says given Vale's dominant position in the global pellet market, this is an area which will be disproportionately hit with the bank upping its average Atlantic Basin pellet premium to $75 a tonne this year (from $59/t previously) and $55 tonne in 2020.
As for the "outsized" shorter term impact on spot prices, Reuters quotes Singapore-based analytics company Tivlon Technologies as saying prices will hit $120 a tonne by August, from a projected $95 a tonne by May. The last time prices were in triple digits was May 2014.