Brazilian mining sector outlook murky after Vale dam accident

Date: Feb 13, 2019

After Vale, the world’s largest iron ore producer, announced it would be taking40 million tonnes per year (tpy) off its output to decommission older tailings dams, local regulators cancelled the license for an additional dam used in an unrelated mine, cutting a further 30 million tonnes annually.

“Previously, our impression was that this would be a matter of a couple of weeks to resolve,” Brazilian bank BTG Pactual’s analysts Leonardo Correa and Gerard Roure wrote in a report on February 6. “Now that call is less likely [to materialize].”

The permit cancellation led Vale to declare force majeure on some iron ore and pellet contracts. Part of the production volumes was meant for exports, but local customers were also hit by the move.

“According to our channel checks, some Brazilian pig iron and steel producers are already concerned about having to reduce capacity utilization due to scarce iron ore availability,” analysts Marcos Assumpção, Daniel Sasson and Carlos Eduardo Schmidt from another Brazilian bank, Itaú BBA, wrote on February 6.

This situation arose following an accident at Vale’s Córrego do Feijão mine in the city of Brumadinho on January 25. A tailings dam failed and flooded the vicinity. So far, 165 people are known to have died as a result of the disaster and 155 more are still missing.

Vale decided to immediately decommission all of the dams built through the upstream method, the same kind that ruptured at Feijão, cutting around 40 million tpy of production in the process. These are considered to be riskier structures.

Later, SEMAD, the environmental agency of the state of Minas Gerais – where Brumadinho is located -, cancelled a permit to a dam that served the Brucutu mine. This decreases output by a further 30 million tpy. This dam was a “downstream” one, a more conventional building method.

Vale initially estimated iron ore production would reach 400 million tonnes in 2019.

The global supply decrease and the uncertainties surrounding Vale have boosted iron ore prices in the past few weeks. Fastmarkets’ 62% Fe iron ore price index hit $90.58 per tonne cfr delivered to Qingdao, China, on February 11, the highest since March 13, 2017.

Brazilian slab prices are also reacting to Vale’s output disruption. Fastmarkets last assessed export prices at $420-470 per tonne fob on February 8, higher than $410-460 per tonne in the week before.

Sources expect slab price rises to accelerate in the coming days. Some Brazilian exporters are set to test $30-50 per tonne fob increases in the February 11-15 week, after the Lunar New Year holidays ended in China.

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