Will Australian Iron Ore stocks surge on the back of Vale crisis?
Team Veye | 11-Feb-2019
Iron ore has surged to hit the highest level since 2014 following a crisis at top producer Vale SA that will curtail global supplies and this may even offset the impact of a slowdown in China - its largest importer. Following the collapse of a mining-waste dam owned by Brazil’s Vale SA resulting in loss of at last 150 lives, the company announced that it would decommission all its upstream units which could impact the production of 40 million tonnes of iron ore. The news has pushed up prices of the steel-making raw material globally and is expected to boost steel prices.
Vale invoked force majeure earlier last 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 tons – this was in addition to the 40 million tons reduction following the Dam burst. In addition, the company’s license to operate a dam at Brucutu was revoked by a state regulator. Although, the exact extent of the lost production wasn’t clear as Vale said that it’ll be able to offset some of the impact by boosting supply from other sites. But as the crisis intensified, Citigroup Inc. boosted its 2019 estimate 40% to $88 a ton and raising the possibility that the disruption to Vale’s operations may yet worsen and could last for years.
The impact was balanced out last week as the most important iron ore user China remained offline for Lunar New Year. But when the country’s exchanges resume operations on Monday, it should help set iron ore’s direction more decisively. In parallel the Chinese markets have slowed down but steel mills in China need security of supplies 24/7, and it’s hard to predict how long this situation will go on.
On the other hand Goldman Sachs has warned that there would be significant disruption to Brazilian supplies in the near term, and prices are expected to go up. Iron Ore is likely to experience volatility as this shortfall cannot be adjusted quickly. But at the same time the bank added that prices of about $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 $60 in 2021. But Capital Economics on January 30 had stated that it foresaw a spike to $US100 a tonne. The situation may be clearer next week but this chaos has bolstered the share prices of BHP, Rio Tinto and Fortescue Metals Group.
Our Analysts do foresee the spike in Iron Ore prices to continue however, it may not be that high in the wake of slowdown in the Chinese Economy and plus other producers may try to catch-up on the deficit with enhanced production to grab a bigger share of the market. So, it would be wise to be cautious while investing in Iron Ore stocks.
Veye Pty Ltd(ABN 58 623 120 865), holds (AFSL No. 523157 ). All information provided by Veye Pty Ltd through its website, reports, and newsletters is general financial product advice only and should not be considered a personal recommendation to buy or sell any asset or security. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation, or needs. You should look at the Product Disclosure Statement or other offer document associated with the security or product before making a decision on acquiring the security or product. You can refer to our Terms & Conditions and Financial Services Guide for more information. Any recommendation contained herein may not be suitable for all investors as it does not take into account your personal financial needs or investment objectives. Although Veye takes the utmost care to ensure accuracy of the content and that the information is gathered and processed from reliable resources, we strongly recommend that you seek professional advice from your financial advisor or stockbroker before making any investment decision based on any of our recommendations. All the information we share represents our views on the date of publishing as stocks are subject to real time changes and therefore may change without notice. Please remember that investments can go up and down and past performance is not necessarily indicative of future returns. We request our readers not to interpret our reports as direct recommendations. To the extent permitted by law, Veye Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss, or data corruption) (as mentioned on the website www.veye.com.au), and confirms that the employees and/or associates of Veye Pty Ltd do not hold positions in any of the financial products covered on the website on the date of publishing this report. Veye Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services.