Global iron ore trade faces dis­rup­tion as S African port shut

The Pak Banker - - BUSINESS -

The global iron ore trade may be dis­rupted af­ter Vale SA, the world's largest pro­ducer, was or­dered by a Brazil­ian court to tem­po­rar­ily close one of its main ports fol­low­ing al­leged en­vi­ron­men­tal breaches. Fu­tures for the raw ma­te­rial in Asia surged along with min­ers' shares.

The court in Brazil's Espir­ito Santo state or­dered a halt to ex­port and im­port ac­tiv­i­ties through Tubarao af­ter iron ore and coal dust were found in the sea. Vale re­ceived the news from fed­eral po­lice "with sur­prise" and will use "all ap­pro­pri­ate le­gal mea­sures to en­sure the reestab­lish­ment of its ac­tiv­i­ties", the com­pany said in a state­ment Thurs­day.

Iron ore has plunged over the past three years as the world's top pro­duc­ers in­clud­ing Vale and ri­vals BHP Bil­li­ton Ltd. and Rio Tinto Group in Aus­tralia boosted low-cost sup­ply, spurring a glut just as China's growth cooled. The im­pact from Tubarao would be de­ter­mined by the du­ra­tion of any clo­sure and how the le­gal case de­vel­oped, ac­cord­ing to Cit­i­group Inc., which es­ti­mated that the fa­cil­ity han­dled about 110 mil­lion tons of ore a year. That's about 8 per­cent of global ship­ments, ac­cord­ing to Bloomberg cal­cu­la­tions.

Should there be a halt of sev­eral weeks, "you would see a very sig­nif­i­cant re­ac­tion," Cit­i­group an­a­lyst Ivan Sz­pakowski said in Hong Kong. Still, "you've had one or two in­stances in the past where Brazil has or­dered ports tem­po­rar­ily shut but com­pa­nies have been able to get an in­junc­tion for op­er­a­tions to con­tinue while the le­gal case is un­der fur­ther re­view. If that hap­pens, it won't ac­tu­ally af­fect the mar­ket from a fun­da­men­tal stand­point."

The SGX Asi­aClear iron ore con­tract in Sin­ga­pore ral­lied as much as 6.9 per­cent to $39.90 a ton on Fri­day, while fu­tures on the Dalian Com­mod­ity Ex­change rose as much as 3.2 per­cent. Iron ore with 62 per­cent con­tent de­liv­ered to the Chi­nese port of Qing­dao, a bench­mark that's set daily, was at $41.29 a dry ton on Thurs­day, ac­cord­ing to Metal Bulletin Ltd.

The Tubarao rul­ing adds to Vale's woes af­ter a deadly dam breach at its Sa­marco Min­er­a­cao SA joint ven­ture last year, and as the com­pany faces a pos­si­ble rat­ing down­grade by Moody's In­vestors Ser­vice driven by the com­mod­ity slump. Vale shares have slumped 33 per­cent since the start of 2016, ex­tend­ing three years of losses.

In the de­ci­sion, fed­eral Judge Mar­cus Vini­cius Costa out­lined fines for each day Vale fails to com­ply with the halt­ing of port ac­tiv­i­ties. Vale has con­tin­u­ally in­vested in en­vi­ron­men­tal con­trols at the port in re­cent years, the Rio de Janeirobased miner said in a sep­a­rate state­ment. Steel-mak­ing gi­ant ArcelorMit­tal also uses Tubarao, al­though the court's de­ci­sion won't im­me­di­ately af­fect its ac­tiv­i­ties, it said in a state­ment.

Vale may be able to man­age some of the short-term im­pact from dis­rup­tion at Tubarao by tap­ping its dis­tri­bu­tion cen­ter for Asia, which is sited in Malaysia and has ex­ten­sive stock­piles, ac­cord­ing to Philip Kirch­lech­ner, di­rec- tor of Iron Ore Re­search Pty and for­mer chief iron ore rep­re­sen­ta­tive for Rio in Shang­hai. "This will en­able them to ful­fill their short-term con­trac­tual com­mit­ments," Kirch­lech­ner said by e-mail on Fri­day. "With hind­sight this was ac­tu­ally quite a smart de­ci­sion to set up this plat­form, orig­i­nally set up for blend­ing and trans­ship­ping but now it is ac­tu­ally be­com­ing a use­ful buf­fer to ab­sorb short-term sup­ply dis­rup­tions."

Min­ers climbed in Syd­ney on Fri­day, join­ing a re­gion-wide rally as oil rose. Rio gained as much as 4.1 per­cent while BHP, which also pro­duces en­ergy, surged as much as 8.7 per­cent and Fortes­cue Me­tals Group Ltd. jumped 8.7 per­cent. The trio are Aus­tralia's three largest iron ore ship­pers. "If it's only for a few days, we won't see too much of a re­sponse in prices; Vale would be able to make up any lost tons," said Daniel Hynes, se­nior com­mod­ity strate­gist at Aus­tralia & New Zealand Bank­ing Group Ltd. "How­ever, any longer than that, could start hav­ing an im­pact."

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