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More Iron Ore Expected From Brazil But Probably Not Enough To Cut Sky-High Prices

A supply squeeze on iron ore which has driven the price up by 35% over the past three months is showing its first sign of easing, though perhaps not for long with pent-up demand likely to give the steel-making material a second wind which could see the price surge through $100 a ton.

Pressure on iron ore is expected to ease after a court decision in Brazil cleared the way to re-start production at the mothballed Brucutu mine, one of several closed after a second dam-collapse disaster raised doubts about the stability of all dams used to retain mine waste.

Vale, the mine’s owner, plans to have the 30 million ton a year Brucutu project back on line within a week after a court dismissed an attempt to keep it closed.

Outages The First Price Driver

Welcome as the return of one mine might be for steel mills which have been forced to pay up to $95/t for benchmark grade ore versus $70/t at the start of the year, the reality is that the overall market for iron ore remains exceptionally tight after most Australian exports were curtailed by the forced closure of ports during a storm, followed by a fire at one port.

Australian supplies are returning but it is unlikely that the shortfall will be made up this year.

Fortescue Metals Group, Australia’s third biggest iron ore miner earlier today confirmed the impact of port closures when it reported a 10% decline in shipments during the March quarter, following earlier reports of a 3% decline in shipments by BHP and 14% by Rio Tinto, the other big Australian miners of iron ore.

The price increase caused by reduced supplies has lifted the share prices of all iron ore producers. Fortescue is up 60% since the start of the year, a rise which has added an estimated $2 billion to the personal fortune of the company’s founder and chairman, Andrew Forrest, who owns one billion shares in the stock which last traded at A$7.40 ($5.25).

Chinese steel mills have been particularly hard hit by reduced supplies and higher prices, especially as steel production has been rising faster than forecast as fear of a trade war induced slump fails to eventuate.

Rising Demand The New Price Driver

Stimulation of the Chinese domestic economy has been the major factor in the steel production boost which Fortescue noted in its quarterly report.

“Chinese crude steel production remains strong, reaching 231 million tons in the first quarter of 2019, an increase of 9.9% year-on-year,” Fortescue said.

It’s the increase in steel production even as iron ore supplies have been tightening which forms the basis of a forecast for a fresh upward surge in the iron ore price by analysts at the investment bank, Credit Suisse.

The bank said that Chinese steel mills had been constrained in their iron ore buying, partly because of assurances from the China Iron and Steel Association (CISA) that port supplies were high.

Disciplined Buying Could Yet Backfire

“We suspect that Chinese steel mills apparent complacency about iron ore is actually discipline to contain the price rise,” Credit Suisse said.

The policy of not rushing to buy even as supplies declined could have been a factor in iron ore not soaring through the $100/t mark, but it could yet backfire.

Credit Suisse said that CISA’s strategy could see steel mills buying what they require from port stocks, while they last.

“But once steel mills have to scour the ocean for prompt (immediate delivery) cargoes, the iron ore price could soar,” the bank said.
Source: Forbes

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