Since the disaster, Vale’s force majeure, benchmark spot prices have spiked to the highest since 2017, then lost some ground. Most banks and commentators expect further gains, although opinion is divided on how long the gains will last. Both Citigroup Inc. and Commonwealth Bank of Australia have flagged the prospects for a near-term surge to $100 a ton. Fitch Solutions Macro Research pushed up its full-year forecast $75 from $60.
Iron ore’s dramatic rally will raise costs for steelmakers, potentially crimping their profit margins unless they are able to pass on the additional burden to customers. That’ll be a critical issue in China, the world’s largest steelmaker, which accounts for half of global output. Before Vale delivered its supply shock, margins went close to breakeven in the fourth quarter, before rebounding a little. Higher raw-material costs will now add pressure on steelmakers, and may prompt a further shift back toward cheaper lower-quality ores ores. That’ll probably aid Australian miners, especially Fortescue Metals Group Ltd.
If Vale’s troubles restrain seaborne supplies, can China’s mills get more ore from home? The mainland has a very substantial ore-mining industry, but production has been hurt in recent years as the content is lower-grade and higher-cost than foreign supplies, and Chinese producers have been the target of a strict environmental clampdown. After Vale’s woes, Goldman Sachs Group Inc. raised the prospect of a rebound in output from non-Brazilian sources, including China. Still, Argonaut Securities Asia Ltd. says local miners will be cautious: “The thing is, this is not a cyclical increase, with prices seen rising for one-to-two years.”
If China’s mills can’t get enough extra material from miners on their doorstep, what about elsewhere? Since Vale’s tragedy, the shares of rival miners — principally in Australia, the top-producing nation — have soared, including BHP Group, Rio Tinto Group and Fortescue. While they’ll undoubtedly benefit from the higher-price environment, there may be a catch when it comes to greater volumes. Among the major producers, only Rio will be able to substantially increase supply, according to Goldman.
(By Krystal Chia and Martin Ritchie)