A remarkable 31% lift in iron ore fines production by Vale, the huge Brazilian miner, has signalled what could be the start of a downturn in global iron ore prices in 2021.
In fact, if Vale continues boosting supply this quarter, pressure on prices will emerge in November and December.
In its September quarter production report, Vale revealed that it had lifted fines output to 88.7 million tonnes in the quarter, thereby regaining the mantle of the world’s leading iron ore miner (by output).
That was a lift of 21.1 million tonnes of fines from the June quarter.
BHP’s total September quarter production was 74 million tonnes (including third party ore – 66 million tonnes in its own right) while Rio’s output was 82.1 million tonnes.
Vale’s solid performance took output for the first 9 months of 2020 to 215.9 million tonnes.
With a further six million tonnes of capacity coming back on stream this quarter Vale says it is confident of reaching the lower end of its 2020 guidance of 310 million to 330 million tonnes by the end of the year. Only a month ago that was looking unlikely.
In fact, Brazilian exports have reached their highest level since the Brumadinho dam disaster in 2019. With more mines now in operation, Vale is able to produce 1 million tonnes per day, and we expect this upsurge in Brazilian production to be sustained.
A major factor will be the level of demand from China next year.
For the 9 months to September, China produced 781.59 million tonnes of steel, up 4.5% from the same period in 2019.
Iron ore imports in the same period rose 11% to 868 million tonnes.
Both are on track to top the billion tonnes level – but the big question is whether that will be as good as it gets.
China’s spending has dragged the economy back into growth (as we saw this week0 with more expected this year and next. There is no major boost in steel demand on the horizon, just more of the same.
Profit margins on steel production have weakened in the past quarter and winter is normally a period of weaker demand for steel and for iron ore until the Lunar New Year (which is on February 12 in 2021, so there will be a pull-forward of iron ore imports in late December through to late January.
But apart from that demand for steel looks like being similar to this year, but with millions of tonnes more Brazilian and Australian iron ore (BHP’s South Flank expansion will produce first ore next year as will Fortescue Metals’ two Pilbara expansion programs (one is the Iron Bridge magnetite mine) and approval to lift exports through Port Hedland from 175 million to 210 million tonnes a year in a staged process over the couple of years.
BHP, Rio, Fortescue and Vale are the four listed market plays in iron ore. Fortescue shares have done the best – its shares are up 57% so far in 2020, followed by Vale with an 18% rise in its market value. BHP shares are down 6% and Rio shares are off 4%.
All up there could be 50 million tonnes or more of extra iron ore coming onto global markets in 2021 (and more if Vale finalises its restart approvals for the remaining capacity idled in the wake of the January 25 dam disaster).
For the first time in almost two years Vale is free of the impact of the January 25, 2019 dam disaster, bad weather and COVID-19 (which remains the biggest imponderable).
The price of 62% Fe iron ore fines was just over $US119 a tonne late last week, down from the most recent peak 10 days ago at more than $US127 a tonne.
Barring any more bad weather or an upsurge in COVID cases then Vale’s improvement is expected to continue.
Industry analysts say that iron ore stocks at Chinese ports are now rising because of weakening demand and profitability for steel products – blast furnace utilisation rates have stagnated as a result.
But Metal Bulletin Fastmarkets analyst see no lasting impact this quarter at least. They pointed out on Thursday that “Chinese iron ore demand has remained resilient amid high crude steel output levels, so we do not expect to see a sharp downward correction in iron ore prices.
“We believe direct-feed iron ore products such as blast furnace pellet face the strongest upside risks to prices this quarter. This is because the demand for these products is boosted by rising domestic coking coal prices, sintering restrictions and pollution curbs imposed by Chinese authorities.”
But look out into 2021 and it could be a different story once the Lunar New Year import bulge passes. Cyclones and wet weather in Australia and Brazil could (as they have had in past years – 2018 and 2019) impact supply and output and allow the market to withstand the new ore supplies.