Iron ore price: Vale makes boldest oversupply move yet
The import price of 62% Fe content ore at the port of Tianjin declined more than 2% to trade at $56.20 per dry metric tonne on Wednesday, a near-eight week low, according to data supplied by The Steel Index.
While demand has held up well, a growing supply glut – an estimated 180 million additional tonnes will enter seaborne trade through 2020 – raises fears of further declines in the price of the steelmaking raw material.
Roy Hill's ramp-up to 55 million tonnes per year are going swimmingly, Rio Tinto's Silvergrass received board approval last month (and the shelving of Simandou surprised no-one), Fortescue has been hitting and exceeding targets, as has Anglo American's Minas Rio, while BHP Billiton's South Flank can be turned on if the world's number three iron ore miner sees it's losing market share.
First ore from the $17 billion Carajas Serra Sul mine expansion and railway project in northeastern Brazil is expected January
And then there's Vale's S11D.
Construction of the $17 billion Carajas Serra Sul mine expansion and railway project in northeastern Brazil is almost complete. Capacity is an eye-watering 90 million tonnes per year at cash costs Vale said it can push down into single digits. First ore is expected in January.
S11D – unremarkable moniker notwithstanding – is the most recognized four letter word in the iron ore world. It's size and cost of production is enough to counter even the most ardent bulls.
Today, Peter Poppinga, head of Vale’s iron ore business, took great pains to educate the market and soften the impact of S11D on an already oversupplied market telling the FT that the development of S11D will be slowed and limited:
“One thing the market is not getting right is how Vale wants to go about ramping up S11D,” he said. “We decided for a phased approach where we will ramp up S11D not in two years but in four years.”
“We are not [in] the pure volume game. We think the right approach … is to maximise our margins,” said Mr Poppinga in an interview in London.
Apart from Vale's infrastructure in Northern Brazil limiting S11D's annual contribution to 75 million tonnes, Poppinga tells the FT just because the project will lift Vale's annual output capacity to 450 million tonnes "it doesn’t mean that we are going to use it."
Implied free-on-board price in Brazil at the moment is a healthy $56.30 a tonne and compares well with Australian FOB prices of $59.68
While the sheer volume coming from the complex in Pará and Maranhão states have been worrying markets, the low cost nature of the project would potentially have an even greater impact.
Vale's told investors S11D would push the company's cash costs per tonne to below $10. Another factor in Vale's favour is freight rates for dry-bulk carriers which have only recently recovered from record lows.
According to the Steel Index implied free-on-board price in Brazil at the moment is a healthy $56.30 a tonne and compares well with Australian FOB prices of $59.68.
Vale's landed cost in China for fines and pellets is below $28 a tonne, not far off its Pilbara competitors. Vale's recent deal with world number four producer Fortescue Metals adds another competitive edge to the Brazilian giant (the relative underperformance of the real also helps).
According to estimates Vale's high Fe-content fines (for which it does not receive enough of a premium at the moment) with FMG's lower quality ore will add a net $2–$4 a tonne to its value.