Global iron ore prices spiked on January 30 after Brazilian iron ore miner Vale said it will cut output by about 10% by suspending operations at mines producing 40mn tonnes of iron ore. The company is the largest iron ore miner in the world and unless it makes up for lost output at its other mines, or other miners step in to fill the gap, supplies are expected to tighten.
Vale's move comes after disaster struck after one of Vale's tailing dams in Brazil burst, killing at least 65 people with hundreds still missing, according to a Reuters report. The move to cut capacity to decommission dams was said as a move to preempt 'tough questions about its safety record' according to the report.
The effect on iron ore prices was immediate. Dalian iron ore futures closed up by 4.7%, while on Singapore Exchange, benchmark futures rose by 9.6% during trading hours, said a Bloomberg report. It said Goldman Sachs had revised its short and long-term price forecasts, with the 3-month target revised to $80/tonne from $70/tonne and 12-month target to $65/tonne from $60/tonne.
Vale's capacity cuts is likely to affect the global iron ore supply situation, for some time at least. There is another risk. The disaster may result in higher scrutiny of safety practices and the risks in mines belonging to other miners, and not just in Brazil. Adverse findings could pose a further risk to output. This needs to be watched out for.
The increase in iron ore prices will mean higher costs for steel producers. That is a risk in the near term but a firm uptrend will also support steel prices going higher. Volatility is what can make things more uncertain for investors. NMDC will benefit if global iron ore prices stay up, as it will earn more on exports and domestic iron ore prices will increase too. That explains why its shares rose by 3.6% on Wednesday.
Recently, it had said that weak demand and liquidity issues were affecting steel demand and therefore that for iron ore, in this Bloomberg Quint report. NMDC's output is under strain, with its cumulative output till December down by 3.7% over a year ago in its Chhattisgarh operations, and down by 19.8% in Karnataka. The pending renewal of an expired mining lease is another overhang.
Tata Steel and SAIL have their own captive iron ore mines, and if higher iron ore prices lead to higher steel prices, then they should benefit. In JSW Steel Ltd's case, it does buy a part of its iron ore requirement and may face higher costs as a result, especially if prices sustain at higher levels. Again, if steel prices trend higher it should be able to make up. Worries on China's economic growth and what that could do to steel demand have seen prices turn soft. Lower realisations imply a decline in profitability for steel companies and the December quarter results should give the first sign of how severe that could turn out to be.
Meanwhile, the spike in iron prices caused by Vale's dam accident is a new factor that investors need to keep a watch on.