Iron ore on route to recovery

This year has not been the easiest of years for iron ore. In January, the collapse of a Vale-owned tailings dam at the Córrego do Feijão iron ore mine near the Brazilian municipality of Brumadinho resulted in over 200 deaths. On top of the tragedy, the disaster has had serious consequences for iron ore supply. However, there’s a growing sense that supply constraints have peaked.

Speaking exclusively to Baltic Briefing, Erik Hedborg, business intelligence company CRU’s senior iron ore analyst, explains: “I think 2019 has been an exceptional year in terms of supply disruptions, but our view is that peak supply tightness in the iron ore market has happened already. That was sort of at the start of Q2, when you had Brazilian suspensions at their peak, when you had extremely poor weather in northern Brazil — where there are no suspensions, actually — and then you had cyclones in Australia.”

He believes that prospects will improve, however perhaps not at the rate that the market would have preferred. “The market was expecting things to improve a little bit faster, but then, of course, the Rio Tinto [mine issues] happened, which is sort of keeping supply relatively low — even though it’s still better than what we saw at the start of Q2.”

Turning to the second half of the year, Mr Hedborg explains that some of the Brazilian suspensions will stay in place for the remainder of the year. However, last month, one mine returned to the market with full production, with the facility poised to return about 30m tonnes to the market. As for northern Brazil, no additional disruptions are anticipated for the rest of 2019, so shipments from this region are set to be “pretty strong” in the second half. Furthermore, Australia is expected to recover from cyclone-related disruptions from March and April this year. Yet, Mr Hedborg notes that Rio Tinto’s quality issue continues to affect shipments from Australia, meaning that the quantity of iron ore shipped will only gradually increase from there in the second half.

Supply issues

A recent report from the government of Australia predicts that global seaborne iron ore supply looks set to drop in 2019 as a result of the Vale incident. The Department of Industry, Innovation and Science’s Office of the Chief Economist’ Resources and Energy Quarterly: June 2019 claims that the Brazilian supply shock will dampen export growth in the short-term. Driven by events stemming from the dam collapse, world seaborne iron ore supply is forecast to decrease by 4.1%, to about 1.529bn tonnes, in 2019. Trade in iron ore is set to perk up next year, increasing by 2.7% to 1.570bn tonnes. However, in 2021, while still higher than the predictions for 2019, supply is expected to dip to 1.568bn tonnes.

The report also notes Chinese iron ore imports decreased by 4.9% year-over-year in the five months to May — to 425m tonnes — which “reflects both the supply disruptions stemming from Brazil and, to a lesser extent, Australia, but also higher domestic iron ore production and the rising use of scrap material — which is displacing some iron ore use”. Chinese iron ore imports peaked at 1.075bn tonnes in 2017 and are expected to decline over the outlook period to 1.029bn tonnes in 2021 because of an anticipated steel output decline and growing scrap use.

Discussing the dam collapse, the report explains: “Vale’s production is expected to gradually recover over the next three years, steadily moving towards the 400m-tonne target it set before the Brumadinho tailings dam collapse. In the meantime, the supply of high-grade (65% Fe content) iron ore will be limited, only improving with the ramp-up of Vale’s S11D project at the Carajás complex and the restart of its Brucutu operations. The full recovery in Vale’s production hinges upon 60m tonnes of production associated with the use of tailings dams. Of this amount, 30m tonnes is expected to come back online if Vale can successfully convert these mines over from wet processing — which relies on water to remove impurities from run-of-mine ores — to dry processing, which does not require the use of tailings dams.

“Vale will also need to prove to government authorities that the subsequent use of blasting will not impact the stability of associated tailings dams (otherwise it is unlikely they will be granted permission to restart),” says the report. “The other 30m tonnes involves operations which are expected to continue using wet processing and tailings dams. The restart of wet processing — expected to take two to three years — requires Vale to prove to authorities that the tailings dams are safe to operate, and in some cases, undertake various measures to strengthen existing dam structures.”

Further afield

Looking beyond the Brumadinho dam but still within Brazil, the report notes that Anglo American’s Minas-Rio is edging closer towards its capacity of 26m tonnes, generating 4.9m tonnes of high-grade iron ore in the March quarter of this year. As for Vale’s high-grade Samarco mine, shut since the November 2015 tailings dam burst, the facility is anticipated to return to production by 2020, with output gradually increasing to its 32m-tonne capacity.

Away from the South American country, the report forecasts Indian iron ore production to increase by approximately 4.6% per year, from an estimated 200m tonnes in 2018 to 230m tonnes in 2021, with growing iron ore production set to be driven by rapidly growing demand from the domestic steel sector. Additionally, the country is anticipated to become a small net iron ore importer from next year onwards.

In Africa, two projects in the Democratic Republic of Congo (DRC)are set to ramp up over the outlook period, according to the report. “The Sapro group recently delivered its first shipment of high-grade (65% Fe) iron ore to China and is expected to ramp up to 12m tonnes by 2022, and the Glencore and Zanga joint venture is expected to supply 2m tonnes of high-grade iron ore over 2019 and 2020. Tacora’s Wabush high-grade iron ore mine in Canada is on track to restart in June and gradually ramp up to 6m tonnes.”

But regardless of the supply ruminations of India, the DRC and Canada, CRU’s Mr Hedborg turns the attention back to the iron ore stalwarts of Australia and Brazil for future supply focus: “Together, they’re over 80% of seaborne supply, so those are by far the most important countries to keep an eye on,” he summarises.