A supply squeeze caused by mine closures in Brazil is not the only reason iron ore rose this week to a five-year high of $97.95 a ton. Demand is also a factor, with Chinese steel production running at a record annualized rate of more than one billion tonnes for the first time.
The combination of Brazil’s problems and surprisingly strong Chinese steel production during a trade war with the U.S. could soon see the iron ore price move back above $100/t, and stay there for some time.
Analysts at J.P. Morgan, an investment bank, are the first to note the record rate of Chinese steel production which reached 85 million tons in April, for an annualized 1035m/t, up 11% year-on-year.
“Chinese steel production is surprising on the upside at a time when iron ore shipments remain materially impacted by supply disruptions in Brazil, and to a lesser extent Australia,” the bank said.
“In our view iron ore prices are likely to remain well supported over the next three-to-six months. The key downside remains potential Chinese domestic supply restarts.”
More Problems In Brazil
Those comments were made before more problems in Brazil were revealed by the country’s dominant iron ore producer, Vale.
According to a report carried by the Reuters news agency earlier today, Vale has told prosecutors in the State of Minas Gerais that a dam holding tailings (mine residue) at its Gongo Soco mine is at risk of rupturing.
Gongo Soco and its problem dam are located 40 miles from a dam at the Brumadinho mine which collapsed earlier this year, unleashing a mudslide which killed an estimated 230 people.
According to documents seen by Reuters Vale is concerned that the dam in the city of Barao de Cocais might collapse as soon as next week if the current rate of movement in the embankment is maintained.
Ongoing safety concerns at Brazilian mines and their associated dams has led to a number of forecasts that the iron ore market could be tighter for longer, potentially prompting Australian miners to boost production despite recent comments that they were unlikely to take that step unless certain that Brazil would struggle to resume full-scale production.
The trade-off for the Australian miners, including BHP, Rio Tinto and Fortescue Metals, is that they’re getting the full benefit of a higher price at a time when they have significantly lowered costs.
Strong Cash Flows For Australian Miners
It is strong cash flow which prompted Foretscue to this week announce a special dividend of $1.3 billion, leading to speculation that the other miners could also reward shareholders with a one-off bonus payout.
Analysts at another investment bank, Credit Suisse, have calculated that iron ore port stocks in China have dropped to a dangerously low level of 134m/t with only 40-to-50m/t freely available and likely to be consumed over the next three months.
If the port stocks do dry up steel mills will be forced to buy cargoes on the spot, or short-term market possibly pushing the price as high as $110/t.