The January 25 Brumadinho dam disaster is expected to knock Brazil’s competitiveness in the global iron-ore market and will elicit a supply response from mines in China, as well as new projects that could be brought on line in the next few years.
This is according to analysts at London-based CRU, who say that the dam breach will not only have an immediate impact on iron-ore supply, prices, quality and pellet premia, but also a long-term impact on the Brazilian iron-ore industry’s competitiveness as quality deteriorates and production costs increase.
Should Brazil impose stricter regulations on tailings dams and the use of wet beneficiation, high-quality products, such as pellets with a typical iron content of about 66% to 68%, will suffer, senior analysts Erik Hedborg and Andrew Gadd state.
Vale has already declared a force majeure on pellet contracts after a court order in Minas Gerais suspended the Laranjeiras dam.
The dam breach is also likely to postpone the return of production of the Vale and BHP iron-ore pellet joint venture, Samarco, which in 2015 suffered a dam wall breach killing 19 people.
“The market was anticipating a Samarco return in 2020, which we now see as highly unlikely,” Hedborg and Gadd say.
So far, 70-million tons a year of capacity has been idled of which CRU expects 40-million tons to remain off line for “considerable time”. Uncertainty regarding the loss of supply and the duration of the supply fall will see iron-ore prices follow an upward trajectory in 2019, incentivising new supply to enter the market.
CRU expects the strongest supply response to come from high-cost producers such as Chinese mines, Commonwealth of Independent State producers and, to some extent, Australian juniors, while majors' supply response is expected to be muted. CRU argues that major miners were already incentivised by high margins to maximise production before the accident, and therefore, are not expected to change their production targets.
Rio Tinto, however, could increase production by up to 12-million tons this year, should it achieve the top of its 2019 guidance of 350-million tons. Last year, the Australian major produced 338-million tons.
CRU also says that the shipping industry has been hit hard by the dam breach, with freight rates from Brazil to China having fallen by 20% since mid-January.
The deadly dam wall breach of January 25, is estimated to have killed about 300 people, mostly Vale employees.