As Scott Morrison and Josh Frydenberg were banking the 22% plus surge in global iron ore prices so far this year in last night’s Federal budget, it seems the shortfall in exports will be much larger than thought last week because of the growing impact of Cyclone Veronica on the Pilbara at the end of March.
The storm now looks like wiping more than 20 million tonnes of Australian iron ore exports in calendar 2019 and more than $A2.4 billion in export income. And the final figures could be higher with one of Rio Tinto’s Cape Lambert terminals still out of action.
But while that will cut export revenues (and tax), there’s a big upside as world ore prices have already jumped nearly 5% to nearly $US90 a tonne since last Friday on the news of the BHP and Rio Tinto shortfalls, and that much bigger one revealed last week by Vale, the big Brazilian miner which says its shipments could fall by 50 to 70 million tonnes this year.
The lost exports from Australia and Brazil could see more than 100 million tonnes of shipments wiped from the global iron ore market this year, supporting the current level of high prices for much of the year.
That’s already showing in global prices – iron ore prices rose 19% in the March quarter and according to the Metal Bulletin, the spot price for benchmark 62% fines jumped by a further 2.2% to $US88.69 a tonne on Monday, adding to the 2.5% jump seen on Friday.
It is now just under the multi-year peak of $US90.58 a tonne set in early February in the wake of the January 25 Brazilian mine dam disaster.
Early estimates from Rio Tinto on Monday and BHP on Tuesday suggest their shipments could be down by a minimum of 20 million tonnes this year.
We have yet to hear from the third exporter, Fortescue about the loss of exports from the four to five day closure of the Pilbara iron ore port of Port Hedland, while one of Rio Tinto’s biggest export terminals at Cape Lambert remains closed as the company starts repairing the damage from the cyclone and a fire at the same port earlier in the year which has already cut exports.
BHP said on Tuesday that “Our preliminary estimate of the impact of Tropical Cyclone Veronica is a reduction in production of approximately 6 to 8 million tonnes (100 percent basis), and as a result, our 2019 financial year production and unit cost guidance are currently under review.”
That was after Rio Tinto told the market on Monday its shipments this year could be 14 million tonnes lower than forecast in February.
“The impact of the disruption to production caused by the cyclone and repairing the damage sustained at the port facilities, combined with the damage caused by the fire at Cape Lambert A in January, will result in a loss of approximately 14 million tonnes of production in 2019.
As a result, Rio Tinto’s Pilbara shipments in 2019 are expected to be at the lower end of the 338 and 350 million tonnes (100 percent basis) guidance provided.”
Rio’s losses could, in fact, grow the longer the export terminal at Cape Lambert in the Pilbara remains offline (Rio can’t say how long the repairs will take), adding to the shortfall and helping support higher prices. Fortescue lost exports could be around two to three million tonnes.
Vale’s problems since the January 25 mine dam disaster in Minas Gerais state (which killed close to 300 people) have dominated world iron ore markets and prices and benefited the Australian trade account and Federal budget and pushed the share prices of BHP, Rio Tinto and Fortescue to multi-year highs in the past week.
Last week we had Vale’s first hard estimate of the loss in exports from the disaster and the closure of mines and associated dams by the company and regulators worried about another damaging disaster.
Vale’s chief financial officer Luciano Siani said last Thursday the company now expects iron ore sales volumes in 2019 to be cut by 50-75 million tonnes, from a previously undisclosed target of 382 million tonnes this year.
Siani told analysts that 2019 sales volumes would be reduced to 307-332 million tonnes, compared with 365.6 million tonnes of iron ore and pellets in 2018.
On Friday the Federal Department of Industry’s March Resources and Energy Quarterly report forecast iron ore income this year would jump 21% to $74 billion in the wake of the January 25 disaster in Brazil and subsequent mine closures.
That, however, was before the problems of Cyclone Veronica emerged with the lost exports. The report estimated iron ore exports would total a record 847 million tonnes in the 2018-19 June 30 financial year and 867 million in calendar 2019 (up from around 836 million in 2018).
Both figures will now be cut by more than 20 million tonnes, but lost export and tax revenues could actually be made up by the rise in prices which the department has already forecast will be $US67 a tonne (free on board) against a 2018-19 budget forecast of $US55 a tonne.