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Brazil's iron ore industry misery, a boom for Australian big miners

Iron ore giant Vale has been forced to close mines in Brazil, representing about 90 million tons of annual product, after a tailing dam disaster in January

Iron ore prices look set to be stronger for longer, potentially delivering windfall profits for West Australia’s big miners for the next two years. As the iron ore price hit a five-year high of US$107.50/t this week, analysts have begun scrambling to revise their estimates as they start to digest the impact of supply disruptions out of Brazil and how long the outages could linger.

Iron ore giant Vale has been forced to close mines in Brazil, representing about 90 million tons of annual product, after a tailing dam disaster in January which killed hundreds. The company is facing another dam failure at one of its inactive mines and its 30mtpa Brucutu mine remains closed with lingering uncertainty as to when it can reopen.

Shares in Rio Tinto hit an 11-year high on Monday before closing up more than 2% after Goldman Sachs placed a buy recommendation on the stock, warning that the global supply deficit could last well into 2020.

This month, Rio revealed it received US$ 2 billion in additional free cash-flow for every US$10/t rise in the iron ore price.

UBS and Commonwealth Bank have also been forced to lift their iron ore price forecasts in recent days. Shaw and Partners senior analyst Peter O’Connor said the Vale outage would last not weeks, not months, but years.

“Iron ore will stay higher for longer than anyone had previously thought — this is an extended-duration event,” he said.

He noted that the Samarco mine in Brazil had not yet returned to production after its tailing dam collapsed in November 2015, killing 19 people and spewing toxic brown mud that polluted rivers and beaches.

“They (Vale) are now on the wrong side of their social license that they’ve got to win back — this is a multi-year issue,” Mr O’Connor said. “Safety and remediation comes first and production is second, and it’s going to be second for a long time.”

Iron ore stockpiles at Chinese ports have fallen to their lowest since 2017 with steelmakers in the country continuing production at near-record rates.

Swing producers of iron ore, such as China and Iran, could be incentivized to enter the market if the price remained elevated for a sustained period but restarting production would take time and there were impediments to resuming operations.

In the interim, shareholders in Rio Tinto, BHP and Fortescue Metals Group are set to enjoy above-average returns.