Supply jitters send iron ore heading for US$100 a tonne

10th May 2019
Resources Rising Stars

Iron ore could cross the symbolic US$100 a tonne threshold in a matter of days after yet another supply disruption added to turmoil in the global market (reports London’s Daily Telegraph).

The commodity, used in steelmaking, initially jumped by as much as 4.4pc on futures markets in China before closing at 652 yuan (US$96) on Tuesday, after mining giant Vale revealed that courts in Brazil had reversed a decision to allow operations to restart at its Brucutu complex.

The move takes 30m tonnes of iron ore out of the market, which has already been rocked by shutdowns at some of Vale’s other mines after an accident at its Brumadinho facility killed some 300 people earlier this year.

FTSE 100 giants BHP and Rio Tinto have also warned that output from their giant Australian mines will be lower this year because of cyclones disrupting operations and damaging port facilities.

Iron ore last hit US$100 a tonne in 2014, before global commodities plunged on the back of oversupply. The following year it touched US$38, bringing swathes of the mining industry to its knees, before staging a recovery.

The metal peaked at about US$190 a tonne in 2011 as China’s economy boomed. Roughly half the world’s iron ore is consumed by China’s steel mills, throwing out raw materials for gigantic construction projects.

Paul Gait, analyst at Bernstein, said: “The supply-demand situation is an awful lot tighter than anyone realised. It is vulnerable to these kind of supply shocks.”

Mr Gait predicted iron ore could hover around US$100 a tonne for some time, allowing mining companies to reap “supra-normal returns”.

BHP and Rio both make huge margins in their iron ore businesses as it costs just US$13 a tonne to mine. Shares in BHP were flat after an initial spike while Rio was 1pc higher.

“Eventually there will be a supply response in some form or other, but given it takes three to four years to build a mine - assuming you have one waiting in the wings - the reaction is never going to be immediate,” Mr Gait added.

Iron ore has risen 44pc in the last 12 months but traded as low as US$66 a tonne in January. Concerns about pollution from steel mills has pushed China towards buying higher-grade iron ore, a shift that is thought to benefit international mining companies.

Analysts at Jefferies said: "The impact of this unprecedented supply shock on the iron ore market will intensify as inventories continue to fall... The path of least resistance - absent an economic downturn - is [for prices to go] higher."

However, Georgi Slavov of commodities broker Marex Spectron warned that prices were unlikely to maintain these highs, with more output coming online from Chinese miners and other, high-cost producers.

“The price spike is starting to introduce new supply into the market,” he said. “Some operations are not profitable at US$60-US$70 a tonne, but as the price moved above that, more and more of these operations have [come back].

 

Subscribe to the RRS Weekly Wrap

© 2019 Resources Rising Stars All Rights Reserved