Iron Ore Faces Supply Problem in Brazil, Rising Demand in China

RIO DE JANEIRO, BRAZIL – Brazil again plays a key role in setting the direction of global iron ore prices, since the country, the second-largest global producer, accounts for a significant share of supply. But as soon as the supply shock subsides, the market’s fate will hinge on China’s still fragile economic rebound.

The main steel ingredient has been traded at over US$100 (R$520) a ton since late May, driven by the ban on Vale’s mining complex in Itabira, which accounts for ten percent of the company’s production. In addition, China produces steel in unprecedented amounts, and this helps boost iron ore price performance among commodities in 2020, benefiting Australian suppliers such as BHP and Rio Tinto.

The first question investors need to answer is how long Vale, the world’s largest iron ore producer, will face supply constraints due to the coronavirus pandemic in Brazil. In addition to the supply aspect, the main question lies in China: to what extent the Beijing government will encourage steel-intensive infrastructure to drive growth.

China’s huge steel industry absorbs around 70 percent of global transoceanic iron ore, and its control over world consumption is growing steadily in 2020. After controlling the first wave of the virus, demand soared with the resumption of activity by developers. Officials also ordered infrastructure projects to be stepped up to tackle the economic crisis.

Consequently, steel production hit a monthly record in May, extending decades of expansion.

“The way to convert the explosion in demand for steel after China’s successful control of the virus into sustained demand is still a challenge,” said Wu Wenzhang, founder and president of Shanghai Steelhome E-Commerce. “Investment in infrastructure will ease the negative pressure on the economy, but consumer and export-related products are expected to encounter obstacles throughout the year.”

Price projections

Projecting prices in the short term is difficult at this time, given the uncertainty over judicial measures affecting Vale’s production, said RBC Capital Markets analyst Tyler Broda. Prices could easily exceed US$120 a ton if there are further supply issues in Brazil, according to Citigroup, which said China’s demand for steel looks resilient toward summer as sectors like automotive and manufacturing start to rebound.

“It’s difficult to assess in which direction prices could go in the short term,” Broda said. “Brazil is a major part of the picture, but not the only factor.”

There is plenty at stake for iron ore producers. Each US$1 increase in average annual iron ore prices adds US$233 million to a measure of BHP’s operating profit, according to a February announcement. For Rio Tinto, a ten percent price rise produces a total increase of US$2.1 billion, the company reported in March.

The companies are also optimistic about the long-term demand outlook. BHP and Fortescue are considering options to expand port capacity, a measure that could allow for increased exports, while Rio Tinto’s US$4 billion mining development program will provide the company with new options to increase volumes.

Source: Bloomberg

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