Iron ore rockets as Vale's supply disruption convulses market


The global iron ore market was pitched into turmoil after Brazil’s Vale SA, the world’s largest producer, outlined plans to cut output after a deadly dam breach, buoying shares of rivals as investors weighed the impact of the disruption. Prices soared, with futures rallying more than 9%.

Vale will decommission some tailings dams, curbing production by 40 million tons a year, Chief Executive Officer Fabio Schvartsman has said, citing a plan presented to the Energy and Environment Ministries. The impact will be offset by an increase in production from other systems, Vale said. The company had planned to mine 400 million tons this year.

The severity of the fallout will hinge on Vale’s ability, as well as efforts by other miners, to make up the tons that’ll be lost. A sharp reduction in supply, if that happens, would tighten the global seaborne market, aiding Rio Tinto Group, BHP Group and Anglo American, while lifting costs for steelmakers across the globe. One of Vale’s dams collapsed recently, hammering the company’s share price and spurring speculation that while the affected operation was minor, the repercussions would affect a greater share of output.

"Vale certainly has the ability to replace 40 million tons in output, and in fact it’d initially have 50 million tons of flexible production," said Vivek Dhar, an analyst at Commonwealth Bank of Australia. "But the key question is how quickly they’ll be able to compensate that output, bearing in mind social, political pressures, and that investigations are still ongoing."

On Singapore Exchange, benchmark futures jumped as much as 9.6% to $86.20 a ton, the highest since March 2017. Futures in Dalian closed 4.7% higher. Even before Vale’s announcement of the supply cut, benchmark ore for immediate delivery hit $80.25 a ton, according to

Australian miners soared. Rio closed 4.5% higher to A$87.30, the highest since 2011, while BHP Group rose 2.6%, and Fortescue Metals Group was up 7.8%.

Other systems

"The estimated impact of the production stoppage is about 40 million tons of iron ore per year, including in this figure the pellet feed needed for the production of 11 million tons of pellets, an impact that will be offset by the increase in production of other systems," Vale said.

The global seaborne market totals about 1.6 billion tons, according to the Australian government. Forty million tons equals 2.5% of that figure.

Goldman Sachs Group boosted its iron ore outlook after Vale’s statement, raising its three-, six- and 12-month forecasts to $80, $70 and $65 a ton from previous targets of $70, $60 and $60. The bank estimated Vale’s output would contract by between 10 million and 15 million tons this year, as the miner would be able to offset some, but not all, of the losses, according to a note.

The accident happened at a time when the seaborne market "was already tight", Goldman said, warning prices are likely to go "significantly higher". There could additional hits to supply as "the incident may lead authorities to tighten environmental checks and affect other companies’ production", it said.

China mills

"This is bad news for steel mills," Huatai Futures analyst Sarah Zhao said via Wechat. A rise in iron ore prices would erode mill profitability, and steelmakers may choose to use more scrap instead of iron ore in steelmaking, she said.

While there may be some relief from mill stockpiles, the incident is coming at a time where China is heading into the construction season. "Lucky for mills, they restocked before prices spiked," said Tomas Gutierrez, analyst at Kallanish Commodities. "Unfortunately for them, it now looks like the hike will be sustained through the peak demand season when they typically earn their best margins."

Impact at sea

Vale’s decision could also have dramatic consequences for the global shipping industry, reducing the volume of cargoes carried between Brazil and top user China, as well as to ports in Europe.

"It is a severe blow to Capesize vessels," said Bloomberg Intelligence senior analyst Rahul Kapoor. "Already reeling from weak seasonality and Chinese slowdown, loss of significant iron ore volumes from Vale will exacerbate the vessel oversupply."

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For 14 free days, you can have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today. Thereafter you will be billed R75 per month. You can cancel anytime and if you cancel within 14 days you won't be billed. 
Subscribe to News24
Rand - Dollar
Rand - Pound
Rand - Euro
Rand - Aus dollar
Rand - Yen
Brent Crude
Top 40
All Share
Resource 10
Industrial 25
Financial 15
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders