RIO DE JANEIRO, BRAZIL – Iron ore’s sudden devaluation is an irrational trend, and the best for companies is to “watch the commodity’s fluctuation from the sidelines,” without “joining the game,” says the Anglo American’s CEO in Brazil Wilfred Bruijn, aka Bill.
He acknowledges that the instability generates uncertainty about the price to be released by companies in the 2022 budget.
Last week, the spot price of ore with 62% iron content for delivery in China, the reference product, accumulated losses of US$30 from Tuesday through Thursday, trading at its lowest value in six months. On Friday, ore recovered US$7 of losses, quoted at US$140.44 a ton, but the sentiment was still cautious.
For Bruijn, the devaluation stems from regulatory measures by the Chinese government to reduce steel production, which would result in lower demand for ore.
“The feeling was that the decline would stall at some point, but that’s not what happened. The price kept dropping,” the executive says. “It’s something more emotional from a market that is looking for a new high. I can’t tell if the next movement will be another 20% drop or a 20% rise.”
Despite the recent downturn, the commodity continues to trade above pre-pandemic values. In February 2020, it was selling near US$80 a ton, almost half of Friday’s price. The increase was the result of a “tight” market, due to little additional supply of ore in the world and a growing demand, notably from China’s steel mills.
Bill explains that the price fluctuation is ultimately reflected in the financial report, since the company does not “lock” the price in hedge operations. This year Anglo American should produce 24 to 25 million tons of iron ore in the Minas-Rio system, in Conceição do Mato Dentro (MG). Production is mainly exported to China, South Korea, Taiwan and the Middle East.
Investments
The uncertainties should not impact the investment plan in Brazil. According to Bill, US$200 million are being invested in the Minas-Rio system, which in addition to the mine, includes a processing plant and a 529-kilometer pipeline to the Port of Açu, in Rio de Janeiro. Next year, another US$250 million will be invested to improve the operation and its maintenance.
Anglo’s Brazilian unit is also working to achieve the goal of using 100% renewable energy in its operations this year, including a self-production share. He says that today, 96% of the energy consumed by the local operation is renewable, including wind and solar. To reach the 100% target, the company is only waiting for the expiration of an earlier energy contract.