Will Australian Iron Ore stocks surge on the back of Vale crisis?

Team Veye | 11-Feb-2019 Australian Iron Ore stocks surge

 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 In addition, the company’s license to operate a dam at Brucutu was revoked by a state regulator.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. 


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