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FEATURE: China’s iron ore market split on Vale impact

As Brazilian miner Vale continues the assess the grim cost, human and financial, of last week’s tailing dam collapse at its Feijão mine in Southern Brazil’s Minas Gerais state, buyers and traders of its iron ore in China are divided on the impact the disaster might have on their business.
Iron ore sector participants in China canvassed by Mysteel show opinion is divided, with some gradually becoming indifferent to the market’s overzealous response and are re-evaluating the likely consequences for iron ore availability and price. But nonetheless, iron ore prices remain very strong at present, market sources noted Thursday, suggesting that many in China are still concerned about the accident’s wider ramifications for Brazilian iron ore trade.

“Currently, Vale’s supply to us has not been disrupted, and we still have not received any official notice on any possible impact to our immediate deliveries,” an iron ore procurement official with a Jiangsu-based steel mill in East China said Thursday. 

“Shockwaves from this accident have swept China’s iron ore market over the past several days, but it might only be temporary. After all, the iron ore capacity affected is limited, so Vale announced, compared to total iron ore capacity. And even if there is an impact on pellet production, its hit on the Chinese market would be small as China is still not a big consumer of imported pellets when compared globally,” he added.

Vale had announced on January 29 (Rio de Janeiro time) that over the coming three years it would decommission ten tailings dams built by the ‘upstream method’ in its Southern System that are all inactive “in order to reintegrate (the dams) into the environment.” However, the company warned that to do this safely and quickly, “Vale will temporarily halt the production of the units where the structures are located”, with the result that 40 million tonnes/year of iron ore capacity including the pellet feed to 11 million t/y pellet capacity are expected to be affected.

The main iron ore products in Southern System are crude fines with Fe content around 60%-62%, Mysteel understands. Vale’s iron ore fines production guidance for 2018 is about 390 million tonnes, and that for pellet at 55 million tonnes, as reported.

“We expect that Vale will increase the production at its other mining areas, which may offset part of the lost capacity caused by the decommission works,” an official of a Hebei-based steelmaker in East China remarked. He too cited speculative market sentiment as the main reason for the sharp rise in imported iron ore prices at present.

“Our market participants are gradually accepting the fact that Vale’s production will be affected and that imported iron ore prices will rise. However, (the incident’s) impact on China’s iron ore market needs to be re-evaluated based on iron ore supply and demand in China itself,” he stressed.

Currently, most Chinese steel mills have completed all scheduled procurement of the raw materials they will need for operating their plants over the upcoming Chinese New Year break during February 4-10. Though fewer deals have been concluded over the past few days, iron ore prices continue to rise, Mysteel notes.

Meanwhile, Mysteel’s latest data showed that the stocks of imported iron ore at 45 major Chinese ports totalled 142.1 million tonnes as of January 24, with stocks of Brazilian iron ore growing for a fifth week, climbing by 374,400 tonnes on week to 37.6 million tonnes, an historical high since Mysteel first conducted the survey in December 2015.

That said, there are still some in the Chinese market who appear convinced disruptions to Vale’s iron ore supply are inevitable and warn that countermeasures should be considered.

For example, a comment issued on Thursday by the compiler of the Purchasing Managers’ Index for China’s domestic steel industry, CFLP Steel Logistics Professional Committee, predicted that the accident would have huge impact on the global iron ore market. 

The committee argued that although Vale had offered reassurance that it would increase production at the company’s other systems to offset the affected iron ore capacity, “the total output from Vale will largely decline in 2019”, which may reduce the global iron ore supply and push iron ore prices up higher. 

For China, Vale’s major iron ore buyer, the CSLPC maintained that though there are some alternative iron ore products available, the decline in Vale’s output will still have some influence on Chinese imported iron ore volume, costs and structure.

“The medium- to long-term impact depends on the Brazilian government’s attitude to Vale,” a Shanghai-based market watcher also indicated. “As (the government’s position) is still unclear at this point, this may mean the speculative market sentiment continues to linger for a while more.”

On Thursday, the most-traded May iron ore futures contract on the Dalian Commodity Exchange in North China’s Liaoning province closed at Yuan 588.5/dmt ($87.5/dmt) at the end of the daytime session, up Yuan 1.5/dmt on day.

Also on the same day, Mysteel’s 62% Australian iron ore fines price index for seaborne cargoes refreshed its 22-month high to reach $84.3/dmt CFR Qingdao, up by another $0.35/dmt on day.

According to the latest update from Vale, as of 8:15 (Rio de Janeiro time) on January 31, the death toll from the disaster had hit 71, and as of 11:30 on the same day, 238 were still missing.

Written by Victoria Zou, zyongjia@mysteel.com
Edited by Russ McCulloch, russ.mcculloch@mysteel.com