Iron Ore Market Looks to Top Miner for Clues on End to Shortages

(Bloomberg) -- Vale SA’s second-quarter production due next week may offer clues on whether the world’s largest iron ore producer could provide some relief to a market reeling from shortages that sent prices to a five-year high.

Analysts, on average, expect the Rio de Janeiro-based miner to report that output of the steelmaking ingredient rebounded to 74.6 million metric tons, from 72.9 million in the three months ended March, according to five estimates compiled by Bloomberg. That’s still below the 96.8 million tons Vale produced in the second quarter last year.

A dam collapse in January forced the company to halt operations with capacity equal to almost a quarter of this year’s original production target of 400 million tons. While Vale has managed to bring its 30-million ton Brucutu mine back to normal operations, that hasn’t halted the surge in prices. Rivals BHP Group and Rio Tinto Group also saw their output decline, deepening the supply shortfall.

"The focus should be around plans for restarting any additional capacity," Scott Schier, an analyst at Clarksons Platou Securities, said in an interview. "There’s been some chatter about a potential restart of some more operation in September-October."

Iron ore prices have surged more than 60% this year in Singapore this year amid the supply disruptions in Brazil and Australia. Futures closed 3% higher at 916 yuan ($133.10) a ton on the Dalian Commodity Exchange Friday, the highest since December 2013.

In May, Vale Chief Financial Officer Luciano Siani Pires said the company expects to bring back online another 30 million tons in shuttered capacity over the next six to 12 months, after Brucutu returns to normal operations. Reviving the remaining 30 million tons would take another two to three years. The miner has maintained its 2019 sales guidance for iron ore and the semi-processed material called pellets at 307 million to 332 million tons.

HSBC Holdings Plc analysts expect a tighter iron ore market longer-term because of "significant supply disruptions," and better demand prospects through 2021. The bank raised its 2019 price forecast for iron ore to $95 a ton, from $82.80 in mid-July.

Rio Tinto’s iron ore production fell 7% to 80 million tons in the second quarter from a year earlier, as a result of a cyclone and operational challenges at its mines. Annual output from BHP’s Australian mines slipped about 2% to 269.6 million tons, missing an average forecast of 272 million tons among five analysts surveyed by Bloomberg.

Vale’s iron ore and pellets sales likely rebounded to 70.6 million tons in the second quarter, from 67.7 million three months earlier, according to the average of five analyst estimates. That’s still down from 86.5 million tons a year earlier.

"We expect supply will take at least two to three years to normalize given the magnitude of the tragedy at Vale," HSBC analysts including Jonathan Brandt said in a note July 14. "A combination of supply disruption from the major iron ore producers and better-than-expected steel production in China has led to a significant rally in iron ore prices."

©2019 Bloomberg L.P.

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