.
Excluding
Vale (NYSE:VALE), close to 8 million tonnes of seaborne iron ore supply from
Brazil is at risk in 2019, a report by Wood Mackenzie states.
According to
the market analyst, such a supply disruption would be the result of the new
regulationpublished by Brazil's National
Mining Agency or ANM, which establishes the ban of all dams in the country
built with the upstream method.
Based on the
new law, companies holding such structures will have six months to present a
technical decommissioning project and until August 15, 2021, and August 15,
2023, to fully conclude deactivation processes of inactive and active dams,
respectively.
WoodMac
reached the conclusion of the supply hitch after analyzing all 226 iron
ore tailings
damsthat the South American country has. Then, the firm's
experts identified those that are of the 'upstream' dam type or of 'unknown'
type and realized there are 35. These are the ones that, in their view, will be
impacted by the decree.
Vale is
expected to produce around 50 Mt less than planned.
“The supply
cutbacks will most likely come from Usiminas, Gerdau, Mineração Morro do Ipê
and junior miners that sell run-of-mine (ROM) ore to Vale and CSN. Pellet feed
production from Usiminas is slated to account for half of the export declines,
with the other half being sinter feed from the remaining impacted producers.
CSN, Brazil’s second-largest iron ore exporter, will likely see its production
chain unharmed given the remoteness of its upstream dams,” the report reads.
The
Edinburgh-based firm also predicts that Vale will produce around 50 Mt of iron
ore less than planned this year.
This is not
only due to the disruptions at its Córrego do Feijão operation following the deadly
dam breach that took place last
January, but also because in aftermath of it, the Brazilian giant announced a
plan to decommission all its 10 upstream dams by 2022, a decision that is set
to impact close to 40Mtpa of the company's total output.
"Vale's
losses of 50 million tonnes (20 million tonnes of net losses from
decommissionings plus 30 million tonnes from Brucutu's shut down) indicates an
incentive price of $85/tonne. A further 8 million tonnes of losses shifts the
cost curve further to the left and suggests an incentive price of
$90/tonne," WoodMac states.
In the view
of the market researcher, such prices could generate some competition from
scrap as a cheaper steelmaking feedstock. They could also prompt demand
destruction, as even a small decline in Chinese hot metal production removes a
big chunk of seaborne iron ore demand.
Global production outlook
“Global iron
ore production will grow modestly from 3,322mnt in 2019 to 3,430mnt by 2028.
This represents average annual growth of 0.2% during 2019- 2028, which is a
significant slowdown from an average growth of 4.5% during 2009-2018,”
predicts, on the other hand, Fitch Solutions.
Despite the
slowdown following the tailings
dam breach near Brumadinho, Brazil is
still expected to lead the modest supply growth in the next decade, together
with India. Fitch forecasts miners in China, which operate at the higher end of
the iron ore cost curve, to cut output due to falling ore grades.
“In the long term, China's iron ore production
will edge lower over the coming years, as weak iron ore prices (once the 2019
rally from renewed Chinese government support to the economy cools) and
tightening environmental regulations force higher-cost operations offline. We
forecast the country's output to decline slightly, from 1,281mnt in 2019 to
1,255mnt by 2028,” the market researcher says in a report.
Australia, on
the other hand, is predicted to see a slight production decline over 2019-2028,
averaging an annual 0.6% contraction, compared to 10.5% growth over the
previous 10-year period.
“This is due
to mothballing of mines from junior miners as iron ore prices remain weak,
while major players will stick to their production growth targets to crowd out
high-cost producers. Declining production costs will keep major miners’
strategy of increasing output to reap economies of scale economically sustainable.
For instance, Rio Tinto and BHP now respectively boast cash costs of $14.30 and
$15.00 per tonne of iron ore, respectively, due to intensive cost-cutting
efforts,” Fitch’s paper reads.
Source: Mining.com