Rio iron ore exports take big hit from cyclone, fire
Cyclone-hit Rio Tinto has added to upward pressure on iron ore prices that are now expected to stay high for a long time and deliver an even bigger budget windfall for federal treasurer Josh Frydenberg.
Rio said on Monday that a combination of damage and disruption caused by Cyclone Veronica last month and a fire in January would cut iron ore production by 14 million tonnes this year.
The double whammy means Rio’s iron ore shipments from Western Australia’s Pilbara region are expected to be at the lower end of the 338 million to 350 million tonne guidance, compounding supply concerns caused by Vale’s mine closures in Brazil following the dam tragedy in January.
Shaw & Partners mining analyst Peter O’Connor said the realities of the Vale production problems would start to sink in in China from this week and predicted the iron ore price could stay in the $US70 to $US90 a tonne range for more than a year.
That is significantly higher than the revised average annual price of $US67 a tonne used last week by the Department of Industry, Innovation and Science to predict record iron ore earnings of $74 billion in 2018-19.
The federal government’s previous forecast, outlined in the mid-year budget update in December, was $US55 a tonne, with iron ore and coal earnings underpinning the election-focused budget cash splash.
Mr O’Connor said Rio had been seen as the only Pilbara producer with capacity to increase production, albeit marginally, to offset the shortfall in Brazil stemming from the Brumadinho dam collapse.
“The Chinese haven’t yet really reacted [to the drop in global production] but we could see that start from this week,” he said.
“It takes about eight weeks to freight from Brazil to China so the impact of the Vale shortfall starts about now.
“The Chinese will suddenly see that they are not getting as many boats from Vale.
“The price so far has only responded to what could happen, as opposed to what is actually happening.”
Global production is expected to be down at least 40 million tonnes. Mr O’Conner said anyone who thought the shortfall would be covered should think again because “it ain’t happening”.
“The $US70 to $90 [a tonne] range should be seen as the range we will be in for quite a while, and by that I mean quarters and maybe a year or so,” he said.
On Monday, Rio said its iron ore operations in the Pilbara were progressively resuming following Cyclone Veronica. However, it is unclear when damage to the wharf at its Cape Lambert A port will be repaired.
Rio Tinto declared force majeure on some contracts on Friday and said it was working with customers to minimise any disruption in supply.
It is understood the damage to the wharf was caused by waves generated by the cyclone and is not structural, while flooding also caused some electrical problems at port facilities.
The wild weather is also thought to have delayed the completion of repairs after a fire at its Robe River sorting plant at the port. The fire in January also forced Rio to declare force majeure on some contracts.
The details of the production hit will become clearer when Rio releases quarterly results this month, but at current prices represents an earnings blow of about $1.6 billion.
BHP, which shut down rail and port operations for three days during the worst of the cyclone, has said any effect on its production would be reported in the next operational review.
Fortescue Metals Group chief executive Elizabeth Gaines said last week the estimate of disruption to the company’s shipping program was between 1.5 million and 2 million tonnes. Fortescue was working with customers to reschedule delayed shipments, she said.
Sign of strength
The Rio share price increased slightly to close at $99.53 despite the production blow, in a sign of the strength in iron ore prices.
Macquarie said it expected Rio to ship 73 million tonnes in the March quarter, meaning it would need to ship at least 88.5 million tonnes a quarter for the rest of 2019 to reach the bottom end of guidance.
“We note that this is at a run rate of over 350 million tonnes per annum, which Rio has only been able to achieve sporadically on a monthly basis,” it said in a note to clients.
“We believe there is some risk of a further cut to 2019 shipment guidance should Rio suffer any further operational issues.”
Merrill Lynch analysts expect 62 per cent grade iron ore prices to average $US84 a tonne in 2019 and said the spot price may increase on the back of Rio’s revised production guidance.
Source: Australian Financial Review