Vale and Rio Tinto: Ore giants struggle to meet Chinese demand

RIO DE JANEIRO, BRAZIL – The world’s two largest iron ore producers struggled to keep up with strong Chinese demand in the first quarter of 2021, under the impact of operational challenges and adverse weather, in a positive sign for prices that are now at the highest levels in a decade.

Vale (VALE3) produced less ore than forecast last quarter due to lower productivity at a mine and fire at a ship loader, signaling that recovery from the Brumadinho dam breach in 2019 has been somewhat slower than expected.

Rio Tinto’s (RIOT34) exports were affected by wetter than normal weather conditions at operations in Pilbara, Western Australia.

On Monday, the benchmark iron ore price topped US$180 a ton – the highest since May 2011 – following news that China’s crude steel output rose 19% last month year-on-year, almost to record levels. China’s higher steel production coincides with government measures to reduce pollution, which has boosted prices and raised profit margins for mills.

“With the market relatively tight at the moment, certainly any problems meeting current guidelines will be relatively positive for the price,” said Daniel Hynes, senior commodity strategist at ANZ Banking Group. “Vale and Rio Tinto maintained their projections for annual production, although Vale’s slower-than-expected recovery may lead the market to reset its expectations,” he said.

Rio Tinto warned that its estimate for annual production of up to 340 million tons is subject to logistical risks associated with bringing 90 million tons of capacity replacement on stream. The mining company also said that tropical cyclone Seroja impacted the Pilbara mine and port operations in April.

It was a “mediocre quarter” for Rio Tinto, Tyler Broda, mining analyst at RBC Capital Markets, said in a report. Quarterly production was 6% below the bank’s estimate, he said.

Steel prices in China ended the quarter at the highest levels in a decade as construction activity and demand from January to March were stronger than in 2020 and 2019, according to Rio Tinto.

Strong demand and margins – at their highest level since 2018 – increased demand for higher-quality iron ore products, and the country’s focus on reducing emissions from steelmaking should limit exports in 2021, supporting margins globally, the company said.

The near-term outlook for iron ore prices remains positive, ANZ’s Hynes said, as Chinese steelmakers are willing to accept the current high prices for their key raw material while margins remain strong.

However, he added that the cost of ore is now well above fair value, with the risk of a pullback later in the year if the Chinese government’s plans to limit steel production to control greenhouse gas emissions begin to impact demand.

“If we saw a 1% drop in Chinese steel production, that would potentially wipe out about 15 to 20 million tons of iron ore,” Hynes said.

Source: Infomoney