Renewed Pressure on Prices Hits Iron Ore Majors

After several days of going nowhere iron ore prices (plus coal, nickel, copper and even oil) prices lurched lower on Thursday after the Chinese government said it would move to bring soaring Chinese thermal coal futures under control.

The move saw prices of major metals and coal all fall on world markets and especially in China after the government realised it had made yet another mistake in allowing coal prices to trade 20% higher or lower of a price band without attaching any controls to prevent speculation.

Those controls appeared in the form of changes to limits by the various domestic futures markets and commitments by big local producers to keep price for thermal coal as low as possible (but not too low).

Iron ore prices fell sharply in the wake of the crackdown which also pinched the boom in domestic Chinese coking coal prices (and in prices outside the country).

The price of the benchmark 62% Fe fines from the Pilbara fell 7% or $US7.14 to $US116.93 a tonne while the price of 58% Fe fines tumbled more than 7% as well to $US88.98. 65% Fe fines from Brazil slid by more than 4% to $141.80.

That smaller fall for the higher-grade Brazilian ore came two days after Vale’s quarterly production and sales report showed a recovery in output that was out of date after the company confirmed it was moving to slow output because of the weak outlook for the ore.

The headlines showed from September quarter results that the Brazilian miner Vale is now the world’s biggest iron ore miner after a solid 18% boost in the three months from June, but Rio Tinto remains the biggest exporter by some distance, despite a weak third quarter.

But despite the strong quarter, Vale revealed it has started trimming output for the rest of this year and has small cuts planned for 2022 if the weak pricing and demand situation continues in China.

Vale had a solid quarter, producing 89.4 million tonnes of iron ore fines in the three months which was up by 0.8% year on year and 18.1% higher than the three months to June.

Rio Tinto was second producing 83.3 million tonnes and BHP moved 70.6 million tonnes (on a 100% basis which includes ore mined for its partners).

Vale’s exports, however, were much lower.

Vale said it shipped 75.9 million tonnes of ore in the quarter (mostly 62% and especially high grade 65% Fe fines) and explained the difference between the amount mined and shipped as the need to rebalance its operations.

Rio topped the list with exports of 83.4 million tonnes while BHP shipped 70.8 million tonnes (again on a 100% basis).

The Australian duo’s shipments were lower for a mixture of reasons – maintenance on key shipping facilities and some labour shortages for BHP – labour shortages and equipment problems for Rio plus delays to a new mine coming on stream.

BHP maintained its 2021-22 forecast for shipments at 278 million to 288 million tonnes but Rio and Vale have both wound their’s back a bit.

The equipment and other problems in the Pilbara saw Rio trim its forecast to the lower end of a range of 320 million to 340 million tonnes. Rio shipped 331 million tonnes of ore in 2020.

BHP shipped 252 million tonnes of ore in the year to June and has just revealed it has won approval to boost its capacity at Port Hedland to 330 million tonnes a year.

It won’t get there this financial year given the problems in the huge Chinese market and restrictions on output from January 1 to March 15 (The end of the winter heating season) for the steelmakers of all types in the 28 major producing cities across northern China.

Vale has trimmed its to the lower end of a range of 315 million to 335 million tonnes. Vale shipped 300 million tonnes of ore last year.

But the slide in prices, especially in the three months to September has seen Vale take the quite obvious decision to slow output.

As a result the company expects production for the whole of 2021 to be at the lower end of its range due to market considerations, with lower demand forecast for lower-quality ores.

“Production and sales strategy is based on market conditions, prioritizing value over volume, with focus on margin maximization. As consequence, for the fourth quarter this year, Vale should lower its supply of high-silica low-margin products by around 4 million mt, as demand for this kind of product has been weaker,” it said in the statement.

“This movement does not change our production guidance for the year, of 315-335 million million tonnes, but should take us below the middle of the range, it said. “If this scenario persists, we should also reduce the offer of low-margin products in 2022 by around 12-15 million mt. The purchase level of third-party ores may also be adjusted accordingly.”

Vale had a production capacity target of 400 million tonnes of exports for next year but in September hauled that back 370 million tonnes because of sluggish government approvals for its expansion plans for its high-grade mining operations in northern Brazil.

That’s not a cut in exports but it does signal that with the weakness already seen in the market and plans to cut shipments by a further 10 to 12 million tonnes next year if the weakness continues, the miner will be hard pressed to top 320 million tonnes of shipments next year.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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