Iron ore prices jumped above $US97 a tonne on Friday – the highest for four years as demand from Chinese mills continued and traders ignored the trade war escalation between the US and China.
Continuing tight supplies of high-grade ore, especially from Brazil also helped boost prices, while the quarterly financial report and commentary from executives of Vale, the big Brazilian miner, and exporter, provided little cheer for the market.
The Metal Bulletin 62% Fe Iron Ore Index ended at $US97.24 a tonne CFR Qingdao in northern China on Friday evening. That was up $US1.86 or just over 2% a tonne on the day and 4.3% from the close the previous week of $US94.17 a tonne.
Trade data for April showed Chinese iron ore imports fell to a 18 month low of just over 80 million tonnes, thanks to the fall in supplies from Brazil in the wake of the January 25 mine dam disaster and from Western Australia where the major exporters are rebuilding after the impact of Cyclone Veronica and a fire at an export terminal (in the case of Rio Tinto.
Rio shares rose 0.9% to $95.27 last week, but BHP shares dipped 0.4% to $36.80. Shares in Fortescue Metals slid 3.3% to $7.54. Vale shares rose on Friday but were down 1.8% for the past week. They are up 14% in the past three months (since the January 25 disaster).
Unlike the solid rise for 62% ore, 58% Fe ore (the main type exported by Fortescue) rose by just 10 cents to $US86.60 – which is still a very solid price. The price of 65% Fe ore (the type sent by Brazil mostly), jumped $US1.70 to $US111.50 a tonne.
Vale, the big Brazilian iron ore giant is the reason for the surge in prices this year in the wake of the January 25 disaster.
It can’t take advantage of those high prices, but they are offsetting the impact of the fall in production and sales generated by the disaster. That has allowed the company to start the clean up of its finances.
The company’s March quarter financial report on Friday, released a day after its production and sales figures for the three month period, showed the extent of the housekeeping – it was brutal.
Vale reported its first quarterly loss in more than three years thanks to the ongoing costs of the January 25 dam walls disaster and the subsequent slicing of its production and export capacity.
The company’s financial strength has been sapped by the dam disaster and the costs of remediation and compensation, along with the impact from the loss of tens of millions of tonnes of export sales this year.
That has left the trio of Australian producers, Rio Tinto, BHP and Fortescue in a very strong position in the global iron ore market.
Vale reported a net loss of $US1.642 billion in the three months to March, – down $US5.428 billion from the December quarter profit, mainly as a result of the above mentioned subsequent events related to the Brumadinho dam rupture.
More importantly, it was down $US3.232 billion from the net profit of $US1.590 billion reported for the March quarter of 2018.
Revenue fell to $US8.2 billion in the Match 2019 quarter from $US8.6 billion a year ago and $US9.8 billion in the December 2018 quarter
Vale said the loss came from funds it has been forced to set aside funds to cover damages, legal costs and other obligations related to the Brumadinho mine dam wall disaster that left 300 people dead or missing in January.
The company said it had set aside a total of $US4.5-billion which saw it report a loss of $US1.64-billion, the first since later 2015.
Vale is now under strict government scrutiny. Local courts have frozen billions of dollars of its assets to ensure the victims will be compensated and environmental remedies implemented. Mines have been ordered closed, including the 30 million tonne a year Brucutu operation in Minas Gerais state.
That is now operating at 10 million tonnes a year rate using drying processing ore. The wet processing was blocked by higher court order last week after Vale had been allowed to bring the mine back into production in mid-April by a lower court decision.
Last year, Vale was looking to boost 2019 output to a record 400-million tonnes. This year it will be considerably less than that and sales of iron ore and pellets will be towards the bottom of the range 307 million to 322 million tonnes.
In its statement Vale said the financial impact of the January 25 Brumadinho dam rupture on March quarter earnings before interest, tax, depreciation, and amortisation (EBITDA) was $US4.954 billion.
That was made up of provisions for the compensation/remediation programs and agreements ($US2.423 billion); provision for decommissioning or “decharacterization” of tailing dams ($US1.855 billion); expenses direct related to Brumadinho ($US104 million); lost volumes ($ US290 million); stoppage expenses ($US160 million); and others ($US122 million).
Vale said EBITDA was also impacted by lower iron ore and pellets sales volume, 30% and 20% lower than the December quarter of last year and the March quarter of 2018, respectively.
“The decrease when compared to 4Q18 was a result of the following effects: (i) the usual weather seasonality (14 million tonnes (Mt); (ii) the impact of production stoppages following the Brumadinho dam rupture (7 Mt); (iii) new inventory management procedures at Chinese ports, which impacted the timing of sales revenue recognition (6 Mt); and (iv) abnormal rains impacting shipments from the Ponta da Madeira port in the Northern System (5 Mt); which were partially offset by inventory drawdowns from Chinese ports in 1Q19 (3 Mt).”
Vale’s base metals business (nickel and copper mostly) reported March quarter EBITDA of $US505 million, down US8787 million lower than the December quarter, “mainly due to lower sales volumes and higher costs, which were partially offset by higher prices. Scheduled maintenance in PTVI and VNC impacted production and, therefore, sales volumes and fixed cost dilution.”
Vale’s coal business EBITDA was a loss of $US69 million mainly lower prices and lower volumes. “Coal volumes decreased due to the severe rainy season in Mozambique when compared to 4Q18, which led to lower dilution of fixed costs,” Vale said.
