Supply Worries Drive Iron Ore Prices to New Heights

Two major dam disasters in three years are enough to put the frighteners on investors and get the media abuzz with talk of supply-side shortages.
Yet as small as Vale’s production loss is, the fact remains the market is relatively tight, and supply is becoming an issue again after many years of plenty.
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According to Reuters, the Corrego do Feijao mine shutdown will result in only a 1.5% production loss to Vale, hardly enough in itself to create a surge in the iron ore price to a four-and-a-half-year high of over $100 per ton last week.
The fear appears to be more about what comes next.

At least 166 people died in the disaster, according to The Times, and almost 200 are still missing. Coming as this does in the wake of the Samarco dam collapse in 2015, questions are being asked about the regulatory landscape in Brazil and whether this will herald a major shakeup.
It’s not that Vale appears to have obviously cut any corners; the mine had been independently audited by TUV and given a clean bill of health.
But the ramifications are worrying investors.
Brazilian authorities have seized Vale assets and there could be ripple effects elsewhere.
There are some 18,000 tailings dams around the world; one would expect, and hope, that authorities are taking another look at those in their own backyard following repeated failings in Brazil.
For now, tightness in the iron ore market, to the extent to which it exists, appears confined to the high purity >62% product. Driven by China’s concerns about air pollution, steelmakers are favoring higher-purity ore that creates less particulate pollution for every ton of finished steel produced.
Supply of these higher grades is largely in the hands of the big three – Rio Tinto, BHP and Vale. Spare capacity for such material is limited; even if it weren’t, none of the three have the incentive to further open the supply tap when prices are rising strongly.
Iron ore has jumped some 25% since the Corrego do Feijao disaster and could rise further now that the Chinese New Year is coming to an end, Reuters speculates.

What This Means for Buyers

Our only caution would be that this is a historically quiet production period. Summer construction is still months away and flat coking coal and coke prices suggest actual steelmaking demand is muted.
Chinese steel rebar prices have been softening, according to MetalMiner IndX data, despite rising iron ore prices, suggesting demand is lackluster.
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If Beijing decides enough GDP slowdown is enough and decides to reflate, then housing- or infrastructure-fueled steel demand may again become a demand dynamic.
But, for now, investor enthusiasm for iron ore may be getting ahead of itself.