Here Comes The Iron Boom, Ready Or Not
Iron Ore just jumped across $100 per tonne. It’s been over 5 years since it’s reached this price, but is it sustainable?
January 25th was when Vale’s Feijao mine in Brazil was flooded due to a collapsed dam. The bust caused 11.7 cubic metres tailings to flood the mine and has killed approximately 300 people. The incident destroyed 93 million tonnes of their iron ore supply which equates to 6% of the market. This caused prices for the commodity to rise from USD$75 to over USD$90.
While Vales stock price took a hit and lost a quarter of its value on the same day. Australian mining groups took full advantage of the demand in the market with Fortescue Metals Group (ASX: FMG), current share price $9.22 jumping 92.08% since the day of the incident, offering a 60c per share dividend, bringing their total dividend for this year to 90c per share, $1.85 billion.
As Iron Ore prices continue to surge, we can see boost in demand from China, with steel prices increasing.
“(The Iron ore price) All depends on the margins of the steel mills….If they can afford to pay it, they will.” Commonwealth Bank of Australia commodity analyst Vivek Dhar, stated.
With China’s steel production reaching a record high there is an optimistic outlook. “When you look at the trade war being extended, that probably means China will need to stimulate more,” Hexavest portfolio manager Étienne Durocher-Dumais stated.
J.P. Morgan, have reported the increase of Chinese steel production to 85 Million tonnes in April 2019, for an annualised 1035 m/t, up 11% year on year. They have also stated, “Chinese steel production is surprising on the upside at a time when iron ore shipments remain materially impacted by supply disruptions in Brazil, and to a lesser extent Australia… In our view iron ore prices are likely to remain well supported over the next three-to-six months. The key downside remains potential Chinese domestic supply restarts.”
The current market sentiment is validated with the release of the Mysteel consultancy report. This shows utilisation in Chinese steel mills increased 0.28% to 69.06% during the previous, despite the tough restrictions being enforce.
Vale is currently attempting to gain authorisation to reopen one of its mines in order to insert and additional 30 Million tonnes of Iron Ore into the market. However, with regulatory restriction currently holding this. It will be a question of time for then they are able to re-enter the market.
Vale SA (BVMF: VALE3) is currently trading at 46.75 BRL, with a YTD decrease of 6.60%. Can they get their additional mines operating in time?
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