Iron ore futures surged more than 5 percent to hit the highest level since 2014 on concern that the increasingly severe crisis at top producer Vale SA would curtail global supplies, tightening the seaborne market and offsetting the impact of a slowdown in China, the largest importer.
Vale invoked a force majeure earlier this week after a judge forced it to suspend some operations at its Brucutu mine in Brazil — a move that it said would result in an annual production loss of 30 million tonnes.
That is top of an earlier reduction of 40 million tonnes following a deadly dam burst.
Photo: AFP
In addition, Vale’s license to operate a dam at Brucutu was revoked by a state regulator.
Iron ore has been supercharged since late last month after the dam burst in Brazil, which killed at least 150 people and rattled the mining industry. The exact extent of the lost production is not clear as Vale has said it would be able to offset some of the impact by boosting supply from other sites.
As the crisis has intensified, banks have raised their price forecasts, with Citigroup Inc boosting its estimate for this year by 40 percent to US$88 a tonne and raising the possibility that the disruption to Vale’s operations might yet worsen and could last for years.
A major risk is that the Brucutu operation might be “the first of many of Vale’s mines to see its production halted.”
There is also the prospect that tighter regulations might affect supplies from other miners, Citi said in a note, outlining its bull case, which carried a 30 percent probability.
Vale’s production would slump 40 million tonnes this year, the bank estimated.
Futures advanced as much as 5.8 percent to US$94 a tonne in Singapore, the highest since August 2014, and traded at US$92 at 2:55pm.
So far this week, prices are 8.9 percent higher after surging 14 percent last week.
This week’s drama has played out as the most important iron ore user has been offline, with Chinese markets closed for Lunar New Year. When the country’s exchanges resume on Monday, it should help set iron ore’s direction more decisively after an initial period of yuan-based prices catching up.
“Steel mills in China need security of supplies 24/7 and it’s hard to tell how long this situation will go on,” Iron Ore Research Pty director Philip Kirchlechner said. “We’re in an unusual situation where it’s in the middle of Chinese New Year.”
Goldman Sachs Group Inc warned that there would be “significant disruption” to Brazilian supplies in the near term, and prices are expected to be elevated and volatile, as production elsewhere cannot be adjusted quickly enough to offset shortages, according to a report from the bank.
Still, Goldman said that further out, prices of about US$90 would not be sustainable as miners outside Brazil, especially in China, are expected to ramp up output.
It sees the price back down at US$60 in 2021.
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