Rio Tinto trims iron ore guidance, market sees price support
Miner Rio Tinto has trimmed its 2020 iron ore shipments guidance from the Pilbara area of Western Australia by between 6 million mt and 9 million mt, or around 2%, due to infrastructure damage and shipping restrictions caused by the recent passage of tropical cyclone Damien.
Seaborne iron ore prices are likely to be supported by the news, analysts said Monday, especially after Brazilian miner Vale also announced reduced first-quarter shipment expectations last week, as a result of heavy rainfall in Brazil. However, the lower shipments could still hit Rio Tinto’s annual EBITDA expectations, they warned.
Rio Tinto’s Pilbara shipments in 2020 are now expected to be between 324 million mt and 334 million mt (100% basis) compared with previous guidance of 330 million- 343 million mt, the company said in a statement Monday.
This would put shipments more on a par with its 327 million mt shipments in 2019.
The company said it is working with its customers to minimize any disruption to supply.
Rio Tinto said its iron ore operations in the Pilbara are progressively resuming following the passing of Tropical Cyclone Damien, with safety being its top priority in ramp-ups. “The cyclone caused infrastructure damage across our entire Pilbara network, including impact to access roads, electrical and communications infrastructure and accommodation. All mine sites experienced some disruption and will take time to return to normal operations,” it said.
S&P Global Platts assessed the 62% Fe Iron Ore Index at $90.10/dry mt CFR North China Monday, up $1.75 from Friday, on perceptions of tight supply, even despite reports of lower steel production in China this month due to restrictions stemming from the coronavirus outbreak.
Market seen tight again this year
Analyst Christopher LaFemina of international brokerage Jefferies said that for Rio, the negative impact of lower-than-expected volumes should be more than offset by the positive impact of higher-than-expected iron ore prices, as the iron ore market is expected again to be tight this year.
While the coronavirus has clearly hit Chinese demand for iron and steel, and Chinese imports account for 72% of seaborne iron ore demand, the impact of this fall in demand has been mitigated by the closure of China’s own mines, which account for about 20% of China’s iron ore supply, LaFemina said. “The supply shock of the closure of these mines is at least partially offsetting the demand shock relating to the coronavirus,” he said.
“Our above-consensus forecast of $85/mt for benchmark iron ore fines compares to the current spot price of $90/mt and is conservative, in our view. Consensus estimates are simply too low,” according to the Jefferies analyst.
BMO Capital Markets currently forecasts Pilbara shipments of 337 million mt in 2020.
“Although the company has not commented on the impact on operating costs and capex, we expect the company’s maiden Pilbara unit cost guidance on February 26 is likely to reflect the impact of the cyclone disruptions. We currently forecast a unit cost of $14.20/mt for 2020,” BMO analyst Edward Sterck said.
“Our preliminary analysis suggests that lower volumes are likely to impact Rio’s 2020 EBITDA by 3%-5%. However, lower seaborne volumes, with Vale…also lowering Q1 shipment due to weather-related issues, could help to keep iron ore prices at elevated levels above our forecasts, at least in the short term.”
Vale last week announced its guidance for iron ore fines production in Q1 was revised to 63 million-68 million mt from previous estimates of 68 million-73 million mt. This followed a fall in its 2019 fines output to 302 million mt, down 21.5% from the previous year as a result of the Brumadinho tailing dams collapse.
Rio Tinto also announced that it has approved a $98 million (100%) investment in a new solar plant at the Koodaideri mine in the Pilbara, Australia, as well as a lithium-ion battery energy storage system to help power its entire Pilbara power network.
The solar plant and battery are estimated to lower annual carbon dioxide emissions by about 90,000 mt compared to conventional gas powered generation. This is the equivalent of taking about 28,000 cars off the road, the miner said.