Australia will be the beneficiary of the terrible mining dam disaster in Brazil which has killed more than 80 people with upwards of 300 missing.
In fact, it would be true to say there is a silver lining for Australia in Brazil’s pain — a surge in iron ore prices that will, in turn, boost export receipts and government tax revenues.
Since the disaster happened on Friday, January 25, the iron ore price is up more than 14% to $US85.35 a tonne on Thursday, the highest the price has been for well over a year (The most recent peak of $US82 a tonne was in January 2018). In fact world, iron ore prices are up 25% since November 22 when the current rebound started.
Just when our terms of trade looked like coming under pressure in 2019, relief from someone else’s pain. The price of fines (an ore type) are up more than 30% at the same time.
And there is every chance some or much of this gain will be retained for months to come as Vale, the big Brazilian iron ore and nickel miner battles to pay for the disaster (the second in three years involving the company in Brazil).
If that’s the case, there could very well be a flood of money into the Federal government (and WA government for that matter) over the rest of 2019 and into 2020. We are not talking a repeat of the heady days of the 2011 mining boom which slowly collapsed, but it could be tens of billions of dollars all up.
The potential impact can be seen from the Federal Government’s mid-year economic statement in December which noted:
“The iron ore spot price is assumed to be US$55 per tonne free-on-board (FOB) over the forecast period. This is consistent with the price assumption at Budget.
The statement pointed out that a $US10 a tonne rise in the price of iron ore over the forecast period boosts nominal GDP by around “$5.5 billion in 2018-19 and $US12.3 billion in 2019-20.” The global price has not been at or below $US55 for more than a year and the premium is current $US30 a tonne.
So can that be sustained? Possibly no, not in the medium term, but over much of 2019, there’s a reasonable chance because to try and eliminate problems with its dams, Vale is going to remove 10 of the 17 tailings dams at its mines (It has 151 iron ore mines across Brazil, mostly in Minas Gerais state). Brazilian banks estimate the cost to be $US1.3 billion (that’s on top of a minimum of $US3 billion in fines and other charges, plus an unknown amount for rehabilitation of the damaged area).
Vale may also be forced to make changes at its other iron ore mines and have safety checks at nickel and coal mines around the world, including Australia. This will take tonnage of iron ore, nickel and coal off the market.
Vale’s CEO Fabio Schvartsman said on Tuesday the mines where the dams are to be replaced produced 40 million tonnes of iron ore a year (that’s on top of the near 8 million tonnes a year from the mine where the latest disaster happened). “We decided the company should, once and for all, do what it takes to remove any doubt about the safety of Vale’s dams,” Mr. Schvartsman told media in Brasilia.
That 48 million tonnes (including the damaged mine) is slightly more than the quarterly exports from Fortescue Metals mines in WA’s Pilbara. It is about 4% of China’s total iron ore imports of more than 900 million tonnes a year.
Vale will boost production at other mines to try and replace the lost tonnage, so the shortfall could end up around 20 million tonnes. Some analysts reckons its also much of current iron ore surplus globally. We have no idea of how long this tonnage will be off the market and the time it will take to replace the dams, but it will be months, not weeks and the impact on global iron ore prices looks like being substantial.
In fact, more analysts reckon global prices could climb over $US100 a tonne in the short term. Some of the tonnage Vale will close are mines that produce ore for pellets – around 10 to 11 million tonnes. Prices for pellets are set to explode as a result – the Savage River operation in Tasmania owned by Grange Resources should get a boost. Its shares are up 10% in the past month.
That’s why the share price of Fortescue metals is up more than 18% since last Friday and why the prices of BHP and Rio Tinto are up as well. And the share prices of some nickel companies are starting to rise because Vale is the world’s biggest nickel miner and there is a feeling it could be forced to close some of those mines around the world for safety checks.
And by the way, coking coal prices are not falling as the mid-year budget update suggested they would. Spot prices for Australian hard coking coal were quoted at more than $US200 a tonne this week, still well above the $US120 a tonne seen in the current quarter in the mid-year review.