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Mining giants set to cash in as Brazilian rival Vale’s COVID woes pile up

The Vale shutdown will take about 10 per cent of its iron ore output offline, or about 2.7 million tonnes per month, which equates to about 2 per cent of a global market that is already jittery on supply.

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“Not big, but two per cent still hurts when you have a tight market already,” said UBS global head of mining research Glyn Lawcock.

Vale has left its 2020 production outlook unchanged at between 310 million and 330 million tonnes of iron ore, saying it had already factored in coronavirus-related shutdowns.

“What the market is most surprised about is they [Vale] are saying their guidance already had provisions for 15 million tonnes. That was a big surprise to everybody, that their guidance included COVID-19 [disruptions],” Mr Lawcock said.

“I think it is fair to say that the market is very sceptical about Vale’s ability to deliver the 310 million to 330 million tonnes this year.”

Since the start of May, iron ore prices have jumped from about $US80 per tonne to $US102.43 at the end of last week. This was partly due to concerns about the potential impact of COVID-19 on Brazilian iron ore production, which accounts for about 23 per cent of iron ore supplied to the seaborne market.

A surprising uptick in Chinese demand due to infrastructure projects has also played a part.

China’s steel mills are ramping up production as the country tries to restore its economic output, with Bloomberg reporting arrivals of the steel-making raw material up 5.1 per cent on the same period in 2019 to 445.31 million tonnes.

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Analysts are bullish on iron ore prices remaining high in the short term, however, there are some concerns Australia’s high-quality iron ore could become too expensive if steel demand declines.

Singapore-based senior analyst with Mysteel global, Hongmei Li, warned Chinese demand for high-quality iron ore may become too expensive for steel mills to make a profit. Steel demand usually softens during the hot and wet summer months because construction slows down, Ms Li said.

“Chinese steel mills will be more careful consuming higher-grade iron ore. They will be consuming more scrap.”

Mr Lawcock said supplies of iron ore at Chinese ports are down by 20 million tonnes since the start of this year, suggesting the market is still in deficit. “If you were a betting person, you could probably say the risks are to the upside.”

Credit Suisse analysts last week sent a note to clients saying Chinese port stocks were declining by 1.6 million tonnes a week in May. Prior to the Vale shutdown, they were expecting weekly surpluses of 1.2 million tonnes per week by the second half of this year as more mines around the world returned to work, pushing prices below $US77 per tonne.

Last week the World Steel Association forecast a 6.4 per cent decline in demand this year, followed by a 3.8 per cent increase in 2021.

The boost to the miners’ shares has also seen the materials sector, which represents nearly a fifth of the S&P/ASX 200’s $1.78 trillion market cap, outpace the wider market, notching a 38 per cent rise compared to the broader market’s 33 per cent lift since its March nadir.

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