Iron ore could spike to $US100 mark as global surplus shrinks
By Timothy Moore
Updated 31 Jan 2019 — 3:48 PM, first published at 3:54 AM
The spot price of iron ore leapt again, and could spike towards $US100 a tonne in the weeks ahead, according to Capital Economics.
The price move and forecast come in the wake of a disaster in Brazil which so far has claimed 84 lives, with more than 250 people still missing and presumed dead after a tailings dam at a Vale mine failed on Friday releasing a wall of sludge. Most of those killed and missing were employees on a lunch break.
Iron ore surged 4.9 per cent to $US82.53 a tonne on Wednesday (Thursday AEDT), according to Fastmarkets MB; the price has surged 10.5 per cent this week.
Mr Strachan said ".. in the short term, the uncertainty could well lead to a price spike, perhaps even towards $US100 per tonne". Vincent Mundy\Bloomberg
On the Singapore Exchange, benchmark futures jumped as much as 9.6 per cent to $US86.20 a tonne, the highest since March 2017. Futures in Dalian closed 4.7 per cent higher. Benchmark ore for immediate delivery jumped 4.6 per cent to $US83.95 a tonne on Wednesday, according to Mysteel.com.
Late on Tuesday local time, Brazil's Vale said it would temporarily halt work at several of its mines where upstream tailing dams are located, which will cut iron ore output by 40 million tonnes a year for three years. It said it hoped to offset some of that lost production with increases elsewhere. It also said it planned to resume output at the mines once the dams have been decommissioned. Vale earlier set an overall 400 million tonne production target for itself for 2019.
"While there is uncertainty around how long the temporary mine closures will last, we think it is prudent to assume that these mines will at least be closed for the remainder of this year," Capital Economics' Ross Strachan said in a note.
"We also believe that other iron ore producers will struggle to materially increase iron ore output over and above their existing plans. Consequently, we think that this will mean that the iron ore market will now be in a much smaller surplus this year."
Mr Strachan, however, said given his expectation that overall demand will weaken this year and global supply will rise, "we still expect a surplus, albeit a small one".
"That said, in the short term, the uncertainty could well lead to a price spike, perhaps even towards $US100 per tonne," the commodities economist said.
"But, assuming that there is no further escalation in the production cuts, the dismal demand outlook would cause prices to drop back markedly from any spike. Indeed, based on our supply/demand calculations, we still expect the iron ore price to end-2019 at $US65 per tonne," Mr Strachan said.
Goldman Sachs boosted its iron ore three, six and 12-month forecasts to $US80, $US70 and $US65 a tonne from previous targets of $US70, $US60 and $US60. The bank estimated Vale's output would contract by between 10 million and 15 million tonnes this year as the miner would be able to offset some, but not all, of the losses, according to a note.
The accident happened at a time when the seaborne market "was already tight", Goldman said, warning prices are likely to go "significantly higher". There could be additional hits to supply as "the incident may lead authorities to tighten environmental checks and affect other companies' production", it said.
Vale's decision could also have dramatic consequences for the global shipping industry, reducing the volume of cargoes carried between Brazil and China, as well as to ports in Europe.
"It is a severe blow to capesize vessels," said Bloomberg Intelligence senior analyst Rahul Kapoor. "Already reeling from weak seasonality and Chinese slowdown, loss of significant iron ore volumes from Vale will exacerbate the vessel oversupply."
Nickel also surged, reaching a three-month high in London amid concern that Vale's output of the metal will decline and further dent global supply as it is mined as a secondary mineral to iron ore at the company's mines. With Bloomberg, Reuters
MGX Price at posting:
65.0¢ Sentiment: Buy Disclosure: Held
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