The January mining disaster in Brazil that resulted in the tragic loss of 300 lives led to the Brazilian courts making the decision to shut down not only Vale’s collapsed mine, but the surrounding iron ore mines as well. Analysts from UBS projected that this decision by the court had instantaneously removed over 90 million tonnes of iron ore from the market, creating immediate global shortages in production. Vale also announced that it would fetter production at a further site, which used a different construction method from the collapsed Brumadinho dam. Christopher LeFemina, an analyst at Jefferies commented on the closure; “These closures were not expected. A continuation of iron ore supply issues in Brazil, combined with improvements in Chinese demand due to tighter steel markets and an expected VAT cut starting in April, should lead to a prolonged period of high iron ore prices.” Vale, the world’s largest iron ore producer, announced in April 2019 that it would sell between 50-70 million tonnes less of the key steel ingredient than it had last year as a result of the disaster. But Vale is not the only producer feeling the production pinch. Rio Tinto and BHP Group, the second and third largest iron ore producers respectively, have also reduced their projected production levels in 2019 owing to the effects of tropical Cyclone Veronica in March the same year. BMO Capital Markets estimated that along with similar losses suffered by Fortescue, 20 million tonnes has been cut from the iron ore market as a result of the cyclone. To cap it all off, Rio Tinto also suffered a serious fire at one of its export terminals in the same West Australian region. “Taken together the two events threaten to significantly tighten the iron ore market, which was expected to be broadly in balance this year. Adding up the anticipated production and shipments disruptions…we could see a total impact on seaborne iron ore production (fines and pellets) of 85-113 million tonnes,” said BMO. According to commodities traders, the Chinese steel industry has remained relatively unaffected by the iron ore shortages thus far, but that could be about to change, placing further pressure on prices. Experts suggested that there was a time delay between iron ore shortages in Brazil and Australia, and the pinch being felt in China, as their stockpiles dwindle.

3. Current and Forecasted Prices

Despite their own woes as a result Cyclone Veronica, both Rio Tinto and BHP, alongside Fortescue, have experienced significant upticks since the beginning of 2019 as a result of the rapidly rising price of iron ore. Since the beginning of 2019, shares in Rio Tinto are up 32%, shares in BHP up 17%, and FMG shares are trading almost 95% higher over the same period. These boosts that Australia’s major iron ore producers have generated in their share price has largely come on the back of a significant increase in the price of the commodity itself, unsurprisingly. BHP, for example, estimates that for every $1 move in the iron ore price, it adds $225 million to its underlying earnings. This has led to all three of the aforementioned companies signalling that they are boosting returns to shareholders, and flagged further potential payouts later in 2019.

“We’ve seen those trends continue and that’s driving strong demand for seaborne iron ore. There’s significant investment continuing, that’s driving demand for steel, and that’s driving demand for iron ore.”

– Fortescue Chief Executive Officer Elizabeth Gaines, March 2019, Bloomberg Television interview. In early 2016, the price of iron ore languished at around US$40 per tonne, as of 2019 that price sits above US$95. In April 2019 alone, iron ore prices increased 29% on where they were in December of 2018.

But the good times for iron ore prices are not projected to stop rolling soon either; steel isn’t a substance that’s going to disappear anytime soon, and steel requires iron ore to be produced, a significant quantity of it. While the present high prices aren’t projected to carry on infinitely, they are projected to remain strong for the foreseeable future. This is great news for iron ore producers, who will be looking gleefully at the forecasts for steel production which show a steady increase in the need for steel over the next few decades.