Oxford Economics comments on Vale crisis

“The terrible disaster at Vale’s iron ore tailing dam at the Feijão mine in Brazil has claimed the lives of 134 people with up to a further 199 reported missing. The disaster has caused widespread outrage and Brazil’s newly elected president Jair Bolsonaro is likely to seek tough punishments for those responsible, with five arrests made so far.”

“The price of iron ore (62% Fe) has risen by 12% to US$81/t as of 6 February as a consequence of the disaster, which destroyed local mining facilities that produced 8 million t of iron ore last year. More significantly, Vale has announced that it will cut 10% of its production in order to replace similar tailing dams, affecting 40 million t of output.”

“Vale is the largest iron ore producer and accounts for a significant share of global mine production. The company will face heavy scrutiny from officials and will have to pay substantial fines. Fitch, the rating agency, has downgraded Vale’s foreign-currency rating to BBB-, from BBB+ which will affect the cost of its borrowing. This will curtail Vale’s ability to invest and slow further developments of its future mining operations at a time when Brazilian iron ore is in high demand from China, which ramped up crude steel production by 6% y/y in 2018.”

“Consequently, we have increased our iron ore price forecast to average US$75/t in 1Q19 from US$67/t. But we still expect prices to pull back this year, averaging US$68/t in 2019.”

“Although production has been impacted at the Feijão mine, we still expect strong supply this year due to Australian miners increasing output to make up for shortfalls in Brazilian production. Vale’s S11D mine is also expected to ramp up output this year and there is still spare capacity at some of Vale’s existing mines. We therefore expect a total reduction of 15 million t from the global seaborne market.”

“More significantly, iron ore demand is expected to fall this year at a faster rate than supply due to slowing economic growth in China which will result in steel production growth slowing to 2.5% y/y in 2019.”

“However, a court ruling in Brazil has recently suspended operations at the Brucutu mine with 30 million t of capacity. Vale has argued the court ruling is unjust and is fighting to resume operations at this facility as soon as possible. If Vale is unsuccessful in its appeal, other producers will be hard-pressed to make up the shortfall.”

“Currently, it is hard to tell what the outcome will be, but an extended closure of the Brucutu mine will certainly drive prices higher, and we expect iron ore will average US$80/t in 2019 if Vale is forced to close the Brucutu mine for an extended period.”

“A further consequence is that spending will be redirected to ensure the safety of other existing mines and dams to ensure that this does not happen a third time. The Brazilian government is also likely to tighten regulation of mining activity and increase safety protocols.”

“But one silver lining is that hopefully this will raise awareness and lower the risk of similar tragedies occurring elsewhere. Overall, while the iron ore market will be tighter as a result of this crisis, any boost for prices is likely to be short-lived.”

Read the article online at: https://www.globalminingreview.com/mining/11022019/oxford-economics-comments-on-vale-crisis/