Pandemic exacts toll on iron-ore sector, but prognosis for recovery is good

24th July 2020 By: Tasneem Bulbulia - Creamer Media Reporter

Pandemic exacts toll on iron-ore sector, but prognosis for recovery is good

The iron-ore sector has been considerably affected by the Covid-19 pandemic, with the worst of the repercussions expected this year; however, there are signs of recovery moving forward.

Global iron-ore production is expected to decline by 1.2% in 2020 to 2.23-billion tonnes, according to data analytics and consulting company GlobalData, owing to a myriad of factors across the iron-ore-producing regions, including the Covid-19 pandemic, environmental issues and legislative challenges.

Speaking to Engineering News & Mining Weekly, GlobalData senior mining analyst Vinneth Bajaj says that in Brazil, iron-ore production will reach 423.3-million tonnes this year, a growth of 4.5% from 2019, that is owed to the resumption of 40-million tonnes of stalled capacity.

Despite this growth, the country’s operations have been disrupted because of Covid-19, which, combined with heavy rains in the southeastern region, caused iron-ore producer Vale’s output to decline by 23.9% to 59.6-million tonnes in the first quarter of 2020, missing the quarter’s guidance of 63-million to 68-million tonnes.

Owing to this, Bajaj says that Vale has lost its spot as the number one producer in Brazil to global mining group Rio Tinto, which produced 66.8-million tonnes of iron-ore in the same quarter.

Subsequently, in April, Brazil’s National Mining Agency ordered the closure of 47 mining dams because their stability could not be certified. Vale owns more than half of these dams.

Moreover, the country has been heavily impacted on by Covid-19, having recorded the second-highest number of cases in the world as of early June, notes Bajaj.

After 188 workers at the company’s mines tested positive for Covid-19, the Brazilian Labour Court suspended operations at the mines in Itabira Complex on June 6. Owing to the outbreak, Vale scaled down its 2020 iron-ore production guidance by 25-million to 30-million tonnes.

The Itabira Complex has two major mines, Cauê and Conceição e Periquito. Itabira produced about six-million tonnes of iron-ore in the first quarter of the year, and about 36-million tonnes in 2019, accounting for 12% of Vale's total iron-ore output in 2019.

Bajaj says production in South Africa is expected to drop by 4.8% in 2020.

“The Covid-19 lockdown measures had a heavy impact on the South African mining industry. Nearly 14 iron-ore projects were put on hold on March 27 [when the country first went into lockdown]. Although restrictions eased a little from mid-April, mines could return to full capacity only from the beginning of June,” he explains.

In India, Bajaj notes that delays in the auctioning of mines, scheduled to be held in March,in the state of Odishawill severely damage the country’s iron-ore output in 2020, which is expected to decrease to 205.7-million tonnes, a 12.5% decline compared with 2019.

“The decline will be partially offset by the Indian government’s decision to allow new owners to start and continue operations until they have acquired fresh forest and environmental clearances, which could have taken up to three years. Twenty-two out of about 25 noncaptive iron-ore mines were successfully auctioned by February, while three were put on hold over a pending legal suit from the Supreme Court of India,” he says.

In Australia, production in 2020 is expected to grow marginally by 0.9%, compared with production in 2019.

Bajaj says that the impact of the Covid-19 pandemic has been limited in Australia, owing to effective measures being taken by government to contain the spread of the virus.

“[R]egional governments began closing their borders from late March, albeit with certain exceptions for essential services workers. To limit the potential spread of the virus, Rio Tinto, BHP and Fortescue made changes to their fly-in, fly-out rosters, switching to two weeks on, two weeks off in the key iron-ore mining regions,” he explains.

Bajaj does note, however, that extensive damage caused by Cyclone Damien to the rail, road and mining infrastructure in Australia forced Rio Tinto to reduce its production guidance for 2020 by about six-million tonnes.

However, global iron-ore production looks set to recover strongly from 2021 to 2024, with this expected to grow at a compound annual growth rate of 3.5% to reach 2.5-billion tonnes in 2024, says Bajaj.

Australia, Brazil, Russia and India are expected to be the key contributors towards the global growth in iron-ore production. Combined production in these countries is expected to increase from a forecast 1.72-billion tonnes in 2021 to 1.92-billion tonnes in 2024.

Consumption Impact

Covid-19 will also significantly impact on iron-ore consumption, which is expected to drop by 2.8% to reach 2.03-billion tonnes in 2020; this decrease is linked to lower construction activity.

Bajaj indicates that the global construction industry has been badly affected by the virus, with workers unable to get back to the sites, and severe disruptions in the delivery of key materials and equipment.

“More generally, the industry will be affected by the expected widespread disruption to economic activities and a likely drop in investments, alongside planned projects – particularly in commercial and industrial buildings sectors – potentially being put on hold or cancelled,” he says.

In a positive scenario that envisions a widespread second wave of infections being avoided, GlobalData’s latest forecasts show that construction output globally will fall by 3.2% in 2020, with a much steeper downturn being prevented only because the construction industry in China, the original epicentre of the pandemic, appears to be recovering quickly.

A mixed scenario is forecast in other parts of Asia-Pacific, with India now expected to record a contraction of 7.5% in its construction output, owing to extended uncertainty around Covid-19 cases there.

Trade Implications

Covid-19 is also affecting iron-ore trade, with supply and demand dynamics disrupted.

China is the world’s largest importer of iron-ore, and the Covid-19 outbreak had a major impact in the first quarter of 2020, with several ports in China having been shut down.

Moreover, supply disruption from the top two exporters, Australia and Brazil, also weighed on iron-ore trade.

The varying lockdown periods in several other major iron-ore-exporting countries, including South Africa, Canada, Peru, India and Iran, significantly affected trade in the first quarter of 2020, notes Bajaj.

Bajaj says the resumption of steelmaking capacities across China has helped to steadily reduce stocks at 45 major ports worldwide by mid-June. Later, the offtake from the ports slowed down, owing to the two-day dragon boat holiday festival held at the end of June. Port stocks then rebounded to 108-million tonnes in early July, he explains.

Further, the pandemic has also affected iron-ore prices, which initially dropped by 8.4% in February, Bajaj notes.

However, prices recovered in March, primarily owing to supply disruptions in Brazil and Australia caused by heavy rains and Cyclone Damien respectively, coupled with a recovery in the Chinese economy. By the start of June, prices had risen to over $100/t.

The suspension at the Itabira Complex, led to a further rise in prices.

The operations, which supply 10% of the company’s iron-ore, were reopened in mid-June, with no change to production guidance. Prices flattened somewhat during June before dropping to $98.94/t in early July, Bajaj informs.

New Projects

Bajaj says the main iron-ore development projects remain broadly undisrupted amid Covid-19 restrictions and are still on track.

He highlights the projects of BHP and Rio Tinto as two key projects that are expected to start in the next two years.

BHP’s $3.1-billion South Flank project, in Australia, is currently under construction. It has an estimated 25-year mine life and is on track to begin operations in 2021. It is expected to be among the most technologically advanced mines in the world, acclaims Bajaj.

Rio Tinto’s Koodaideri iron-ore project, in Australia, is also under construction. The $2.6-billion project has an estimated yearly saleable iron-ore production of 43-million tonnes and is expected to begin operations in late 2021.

Although the pandemic will considerably impact the iron-ore sector in 2020, the outlook is more positive beyond this year, with production slated to rise, consumption demand set to increase, trade normalising, and new developments coming onstream.