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Iron ore price could temporarily spike above $US100 a tonne after dam collapse

Iron ore prices are tipped to temporarily spike above $US100 a tonne after mining giant Vale announced it had been ordered to halt some mining operations following last month’s horrific dam collapse in Brazil.

News of the stoppage, which emerged from Brazil overnight on Monday, sent shares in Australia’s big three iron ore producers, Rio Tinto, BHP and Fortescue Metals Group, up strongly on Tuesday as investors bet they would benefit from a higher commodity price.

Fortescue’s stock jumped 4.7 per cent to close at $6, while Rio rose 3 per cent to $89.26 and BHP climbed 1.1 per cent to $35.39. The three Australian miners’ market capitalisations have surged about $24.34 billion as the shockwaves from the dam collapse continue to reverberate around global markets.

On a full-year basis, the court-ordered halt of some operations at Vale’s Brucutu mine could cut the company’s iron ore production by 30 million tonnes, with ramifications for global supply and the iron ore price.

CBA commodity strategist Vivek Dhar said a reduction of this magnitude would equal about 2 per cent of the global seaborne iron ore market each year.

He predicted the iron ore price could temporarily jump in excess of 15 per cent from current levels of $US86.65 a tonne to more than $US100 due to the production cut, but noted the court order could be reversed quite quickly.

While Brazilian regulators are yet to make final recommendations on how Vale must respond to the dam disaster, which killed hundreds of people in the south-eastern Brazilian town of Brumadinho, “criminal and financial penalties appear the most considered options”, he said.

However, Vale’s iron ore production was at risk too, as the 30 million tonnes were on top of about 40 million tonnes per annum of iron ore output that would be sidelined as Vale decommissioned its upstream tailings dams, Mr Dhar said.

“The length and degree of disruption that Vale’s dam collapse will have on global iron ore markets remains unclear. Vale’s response to the disaster provides some clarity, but does little to give the market any real confidence on Vale’s iron ore production this year (and potentially in coming years),” he said.

He upgraded his forecast for iron ore prices in 2019 by about 19 per cent to $US82 a tonne, and about 9 per cent to $US71 a tonne in 2020.

But Mr Dhar said he saw “upside risk to our price outlook given the downside risks and uncertainty facing Vale’s production outlook”, adding that the order relating to the Laranjeiras dam “could be the first of many. There is also a tangible risk that Vale doesn’t manage to reverse the court order to halt some production at Brucutu”.

Vale said the court had ordered it to stop disposing of tailings, or undertake any other activity that could increase the risk at any of its nine dams, including Laranjeiras.

Vale said three of the nine dams were already inactive and that the remaining six were all licensed and had “stability reports in force. Vale therefore understands that there is no technical basis nor risk assessment to justify a decision to suspend the operation of any of these dams”.
Source: Sydney Morning Herald

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