Brazilian iron ore supply disruptions to be expected – Report

Excluding Vale (NYSE:VALE), close to 8 million tonnes of seaborne iron ore supply from Brazil is at risk in 2019, a report by Wood Mackenzie states.

According to the market analyst, such a supply disruption would be the result of the new regulation published by Brazil's National Mining Agency or ANM, which establishes the ban of all dams in the country built with the upstream method.

Based on the new law, companies holding such structures will have six months to present a technical decommissioning project and until August 15, 2021, and August 15, 2023, to fully conclude deactivation processes of inactive and active dams, respectively.

WoodMac reached the conclusion of the supply hitch after analyzing all 226 iron ore tailings dams that the South American country has. Then, the firm's experts identified those that are of the 'upstream' dam type or of 'unknown' type and realized there are 35. These are the ones that, in their view, will be impacted by the decree.

Vale is expected to produce around 50 Mt less than planned.

“The supply cutbacks will most likely come from Usiminas, Gerdau, Mineração Morro do Ipê and junior miners that sell run-of-mine (ROM) ore to Vale and CSN. Pellet feed production from Usiminas is slated to account for half of the export declines, with the other half being sinter feed from the remaining impacted producers. CSN, Brazil’s second-largest iron ore exporter, will likely see its production chain unharmed given the remoteness of its upstream dams,” the report reads.

The Edinburgh-based firm also predicts that Vale will produce around 50 Mt of iron ore less than planned this year.

This is not only due to the disruptions at its Córrego do Feijão operation following the deadly dam breach that took place last January, but also because in aftermath of it, the Brazilian giant announced a plan to decommission all its 10 upstream dams by 2022, a decision that is set to impact close to 40Mtpa of the company's total output.

"Vale's losses of 50 million tonnes (20 million tonnes of net losses from decommissionings plus 30 million tonnes from Brucutu's shut down) indicates an incentive price of $85/tonne. A further 8 million tonnes of losses shifts the cost curve further to the left and suggests an incentive price of $90/tonne," WoodMac states.

In the view of the market researcher, such prices could generate some competition from scrap as a cheaper steelmaking feedstock. They could also prompt demand destruction, as even a small decline in Chinese hot metal production removes a big chunk of seaborne iron ore demand.

Global production outlook

“Global iron ore production will grow modestly from 3,322mnt in 2019 to 3,430mnt by 2028. This represents average annual growth of 0.2% during 2019- 2028, which is a significant slowdown from an average growth of 4.5% during 2009-2018,” predicts, on the other hand, Fitch Solutions.

Despite the slowdown following the tailings dam breach near Brumadinho, Brazil is still expected to lead the modest supply growth in the next decade, together with India. Fitch forecasts miners in China, which operate at the higher end of the iron ore cost curve, to cut output due to falling ore grades.

Australia’s Port Hedland iron ore loading terminal, the largest source of seaborne iron ore supply globally. Photo from archives.

“In the long term, China's iron ore production will edge lower over the coming years, as weak iron ore prices (once the 2019 rally from renewed Chinese government support to the economy cools) and tightening environmental regulations force higher-cost operations offline. We forecast the country's output to decline slightly, from 1,281mnt in 2019 to 1,255mnt by 2028,” the market researcher says in a report.

Australia, on the other hand, is predicted to see a slight production decline over 2019-2028, averaging an annual 0.6% contraction, compared to 10.5% growth over the previous 10-year period.

“This is due to mothballing of mines from junior miners as iron ore prices remain weak, while major players will stick to their production growth targets to crowd out high-cost producers. Declining production costs will keep major miners’ strategy of increasing output to reap economies of scale economically sustainable. For instance, Rio Tinto and BHP now respectively boast cash costs of $14.30 and $15.00 per tonne of iron ore, respectively, due to intensive cost-cutting efforts,” Fitch’s paper reads.