Vale iron-ore mine halt risks 'incremental supply shock'

Vale SA said it’s temporarily halting some operations at its Brucutu mine, potentially causing a production loss of about 30 million metric tons of iron ore a year — a move that an analyst said could cause “incremental supply shock.” Iron ore in Singapore climbed.

The move is in compliance with a Brazilian court order issued to help improve safety after one of Vale’s tailings dam in Minas Gerais state collapsed in late January, killing more than 130 people and leveling part of a town. The output cut is on top of the planned 40 million ton curbs that the company will implement as it decommissions dams similar to the one involved in the fatal accident.

 Shutting that mine could “wipe out almost all the global production growth” forecast by the bank this year – analyst

“This would be an incremental supply shock to the iron ore market and would support prices at higher than expected levels,” Jefferies LLC analysts including Christopher LaFemina said in a note Monday.

The market has already been jolted by the earlier announced output cuts. Iron ore prices have climbed since Jan. 25, when the Vale dam broke, on speculation the world’s largest miner of the steelmaking ingredient could face stricter regulations, crimping supply. Futures in Singapore rose 4 percent in thin trading on Tuesday, after a 14 percent surge last week. Spot prices for all grades of ore have also gained, with high-quality material topping $100 a ton.

Vale said it is appealing the court order on Brucutu as one of the mining dams mentioned in the decision is a different type than the one that ruptured last month.

Should the company fail in its appeal of the court decision on the Brucutu mine, Barclays Plc analyst Ian Littlewood said shuttering that mine could “wipe out almost all the global production growth” forecast by the bank this year. Littlewood had earlier predicted mine supply around the world will expand by 34 million tons.

“If Vale is able to continue to produce during the appeal, then there would be no fundamental impact but as we have stated previously, the risk premium is likely to sustain in the short term but diminish through the year,” Littlewood said.

Inventories of iron ore from Brazil shipped to ports in China fell last week for the first time since November, data show.

On Monday, Vale also announced a temporary suspension at the Vargem Grande complex, which accounts for around 13 million tons of iron ore per year. The move is part of its previously announced plans to curb 40 million ton of output.

Vale has said it would aim to partially offset that 40 million tons of lost production by increasing output elsewhere, while many analysts estimated only a slight drop to the miner’s net production. The company originally planned to produce 400 million tons this year.

Operations at Brucutu are likely to be resumed in the near term, once Vale provides the court with the required information, Bradesco BBI analyst Thiago Lofiego wrote in a note. That would limit the impact on shipments, he said.

 (By R.T. Watson)