Iron ore: Update on The Brumadinho (Vale) tailings dam failure

A tailings dam burst at Vale’s Corrego de Feijao mine on the 25th January has caused multiple fatalities, widespread damage to property and the environment as well as the suspension of all operations except for emergency activities. The mine is located near Brumadinho, a municipality in the state of Minas Gerais. It forms part of Vale’s Paraopeba complex, which consists of four mines, and sits within the wider southern system operation. In 2018, the mine produced 2.9 Mt of marketable ore, with the entire product sold on the seaborne export market. Across the wider Paraopeba complex, production in 2018 amounted to 23.1 Mt. The direct impact of the suspension of activities at Corrego de Feijao is minimal, with 2018’s output representing just 0.7% of Vale’s 394 Mt total output, while the wider Paraopeba complex accounted for 5.9%. However, the fallout from the disaster will be wider spread. Vale has already announced that it will cut 40 Mt of production (~10% of total annual output ) as it begins the process of decommissioning 10 upstream facilities. Vale has though stated that it will offset the lost production in Minas Gerais by increasing production of other systems run by the company, with Vale estimated to have ~50 Mt of spare capacity. At present, it remains difficult to predict the extent to which annual iron ore production in Brazil will decrease due to the ongoing possibility that extensive studies from environmental entities/regulatory bodies at existing operations and licensing operation suspensions could further cut output, even after the pre-emptive production cut. While supply is inelastic and likely to be slow responding to the 40 Mt of capacity coming off line, port stocks of Brazilian iron ore in China are substantial and are able to make up for deficits in the short term. Based on the immediate price reaction and an expected drawdown of stocks in China, we raise our Q1 forecast for benchmark 62% iron ore to $77 /t. We also raise our overall 2019 average to $71/t due to a narrower surplus in the seaborne market than previously forecast. We also note that productio n cuts in Brazil will support high-grade (66% fines and pellet) premiums. Ultimately, the outcome is likely to result in a more hostile environment for miners in Brazil and require higher cash costs per tonne of production. These impacts could even stretch out beyond Brazil and lead to tougher industry regulations, e specially around tailings dams, for mine r s across the world.