Iron ore prices in focus as markets mulls possible global shortage

On Friday, a decommissioned tailings dam at the Feijao mining complex in Brumadinho, Minas Gerais, burst with apparently little warning. Mud swept through the mine’s busy cafeteria as well as mine offices and nearby buildings. So far 58 people have been confirmed dead with hundreds still unaccounted for.

The owner, Brazil’s Vale, has halted operations while it focuses on rescue efforts and safety, which in turn has led to speculation there will be a shortage in global iron ore supply, a key ingredient in steel.

In Dalian, China, iron ore futures rose 6% following the disaster, noted analysts at SP Angel, while London-listed miners saw their share prices jump. As at midday in London, BHP Billiton and Rio Tinto were both ahead a little over 1%. Anglo American was flat after a strong morning's trading.

However, analysts at RBC argued: “We do see potential that Vale’s overall production may lag in the coming months as the company refocuses on safety. So although short-term iron ore prices may rise on sentiment, with our forecast for a surplus of 59mt for 2019, we continue to believe fundamental pressure on iron prices is likely to remain.”

The collapse is significant blow to Vale, however, which has looked to stabilise in recent years following another highly-damaging dam collapse in 2015. That one, at a mine jointly owned with BHP in the Minas Gerais region, killed 19 people and caused massive environmental damage. Both companies were heavily fined for their roles in what is considered to be Brazil’s worst environmental disaster.

Over the weekend local courts froze $2.9bn of Vale’s assets to pay for damage caused by the latest collapse, while the Environmental Protection Agency issued an immediate $66.5m fine. US lawyers are understood to be preparing class action suits.

Said RBC: “Although Vale’s modest levels of debt should protect the company’s solvency, we expect the aftermath of this incident will weigh on the equity for the foreseeable future.

“It is certainly too early to quantify any financial impact, but we fear the potential liabilities for a disaster so similar to the one in 2015 will likely be heightened. The inspection of Vale’s remedial processes for dam maintenance will likely come under investigation.”