Iron ore price spikes as Vale's production cut set to disrupt market
Seeking Alpha
Published Jan 30, 2019 08:08AM ET
Iron ore price spikes as Vale's production cut set to disrupt market
- Chinese iron ore futures surge more than 9% and shares of mining rivals BHP and Rio Tinto (NYSE:RIO) each rise ~2% in pre-market trade after Vale (NYSE:VALE), the world’s largest producer, outlined plans to cut production following Brazil's deadly dam breach.
- Vale said yesterday it would take as much as 10% of its output offline as it decommissions a total of 19 dams over three years, a move that would cut up to 40M tons of iron ore production this year.
- Analysts say the move could dethrone Vale as the world's top supplier of seaborne iron ore and benefit rivals such as Rio, BHP, Fortescue Metals (OTCQX:FSUMF) and Anglo American (LON:AAL) (OTCQX:AAUKF, OTCPK:AAUKY), and any sharp reduction in iron ore supply would tighten the global seaborne market while lifting costs for steelmakers around the world.
- “Vale certainly has the ability to replace 40 million tons in output,” says an analyst at Commonwealth Bank of Australia. “But the key question is how quickly they’ll be able to compensate that output, bearing in mind social, political pressures, and that investigations are still ongoing.”
- Goldman Sachs (NYSE:GS) raised its iron ore guidance after Vale’s move, hiking its three-, six- and 12-month forecasts to $80/ton, $70/ton and $65/ton from previous targets of $70, $60 and $60, and estimated Vale’s production would shrink by 10M-15M tons this year as the miner would be able to offset some but not all of the losses.
- The accident happened at a time when the seaborne market “was already tight,” Goldman said, warning prices are likely to go “significantly higher,” with potential additional hits to supply as “the incident may lead authorities to tighten environmental checks and affect other companies’ production.”
- Now read: iShares MSCI Australia ETF: Macro Outlook 2019
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