Iron ore prices to rise even higher, JP Morgan reckons

JP Morgan Cazenove has raised its forecasts for iron ore prices, arguing that the reduction in Vale’s output in the aftermath of the Feijao dam collapse is likely to be worse than initially forecast.

Iron ore prices have already railed around 17% since a dam at Vale’s Feijao mining complex in Brumadinho, Brazil, collapsed in January, causing wide-spread loss of life and damage.

Vale, the world’s biggest producer of iron ore, announced it was temporarily reducing annual iron ore production by 10%, or 40m tons per year, because a number of its upstream mines would be closed while it decommissioned 10 tailings mines.

But in a note published on Monday, JP Morgan said: “Quantifying the consequences is complex due to an evolving investigative process that has resulted in Brazilian authorities expanding the suspension of specific Vale mining operations, plus prohibiting use of upstream dams by 2021.

“[We] now expect a more severe impact on Vale’s output, forecasting a loss of 45mt in 2019 and 35mt per annum across 2020-22.

“Rio Tinto and BHP Billiton have minimal spare capacity in 2019. Therefore, due to tighter supply, we raised 2019/20 estimated prices to $77/$70 per ton [from] $70/$65 per ton previously.

“We remain positive on the investment case for diversified miners, due to substantial discounts versus historical multiples, and versus the market, but valuations and investment themes are diverging.”

The bank said that Rio and Anglo American “appear cheap, even if iron order prices fell 30%, while BHP was screening as “relatively expensive” after outperforming Rio by 12% since January 2018.

JP Morgan is ‘underweight’ on BHP and ‘overweight’ on Rio and Anglo American.