Commodities will dominate markets today – not the usual candidates in gold and oil but iron ore as China restarts after last week’s Lunar New Year holiday during which Vale, the world’s biggest iron ore miner was forced to take mines and associated dams offline and with them between 30 and 70 million tonnes of ore.
With stocks of iron ore at ports and mills low after the holidays, Chinese buyers will chase spot ore cargoes from today and could push the already high price of standard 62% ore (that’s its iron oxide content) past $US100 a tonne in coming days.
Seaborne iron ore prices stayed largely flat on Friday with China’s week-long public holiday coming to an end, though there was scattered activity in the high-grade segment.
That followed news that Vale had declared force majeure on some its customer contracts from the impacted mines in Minas Gerais state.
The price has already rallied 33% since November 26 last year. Gains for lower grade ore have been even larger with the price for 58% fines jumping 60% over the same period.
The Metal Bulletin 62% Fe Iron Ore Index on Friday of $US85.53 a tonne was unchanged because of the break in China. The 62% Fe Pilbara Blend Fines Index price of $US86.37 a tonne was also unchanged.
The 58% Fe Premium Index price was unchanged at $US78.74 (that’s the basic ore type Fortescue ships to China) the 65% Fe Iron Ore Index jumped $US2.50 a tonne to $US103.30 a tonne. That’s the ore grade Vale likes to ship to China and which now will become increasingly scarce if the shut down continues.
After sold runs last week, watch the prices of BHP, Rio Tinto, Fortescue and other mining shares (such as nickel group Western Areas with nickel prices hitting a nine-month high last week)
The ASX Metals & Mining Index rose to a near seven-year high on Wednesday of last week and is currently up more than 9% for the year-to-date thanks to the fears about the impact of the Vale mining disaster on January 25 and production cuts will have on supplies.
So far there have been 114 fatalities as a result of the dam collapse, 67 of whom have been identified, while 259 remain missing. A total of 393 people have been found, and 192 rescued.
BHP Group closed Wednesday’s trading at its highest level since August 2011, while Rio Tinto rose to a more than 10-year high. Fortescue shares hit a two year high the same day.
Friday saw shares prices ease but BHP still closed at $US35.33, up 3.2% year to date, Rio shares ended at $US90.57, up more than 15% so far this year and Fortescue shares ended at $6.04, up a massive 44% so far in 2019. That surge has been led by the sharp rise in the 58% fines price ore type of more than 60%.
Vale’s share price has fallen 19% in the past month to be down more than 13% so far in 2019.
Adding to the growing pressure on prices was news on Friday that authorities in Brazil had evacuated 500 people living under a tailings dam owned by Vale and a further 200 people living under a tailings dam owned by steelmaker, Arcelor Mittal.
Brazil’s TV Globo said Vale was evacuating 500 people from three communities around the Sul Superior tailings dam at the Gongo Soco mine, near Belo Horizonte in Minas Gerais state (where the January 25 disaster happened and many of the at-risk dams and mines are located) on the orders of the national mining regulator. It said it was a preventive measure after an engineering consulting firm refused to give the dam a declaration of stability.
And in a separate development, 200 people were evacuated from Itatiaiuçu, in the same state, after an alert was issued over a dormant dam operated by ArcelorMittal. The steelmaker said that “after very careful consideration” it had taken the decision to put in practice an evacuation plan related to its Serra Azul tailing dam.
On Friday authorities also closed a port terminal operated by Vale in Vitoria, in the south-eastern state of Espírito Santo because of pollution issues. The municipality of Vitoria said on Thursday it had fined Vale 35m reais ($US9.5 million) for throwing mining residues into the sea. Vale reckons it is meeting allowed levels of discharge and pollution of iron ore and other residues at the port.
The port is the largest iron ore export operation Vale has with an annual throughput of 80 million tonnes or 30% of Vale’s total production. There is no word of when exports might be allowed to resume.
Brazilian media reports say the country’s government will not allow Vale to lift production at other mines to make up for the losses of up to 70 million tonnes (and more if the Vittorio port remains closed).
If this situation is confirmed and continues it will through the iron ore market into total confusion and prices escalate very quickly – and see the Australian big three miners very well placed to benefit.
And so will the Australian federal budget which has an iron ore estimate of $US55 a tonne for 2018-19. That is obviously too low and will produce windfall gains the longer the situation continues for the companies, the country and the terms of trade.
