Iron ore prices jump as Vale plans production cuts

Shares in blue chip miners rallied on Wednesday after Brazil’s Vale said it was temporarily reducing annual production of iron ore by around 10%.

The miner said it would close a number of upstream mines in Brazil while it “safely and quickly” decommissioned 10 tailings mines similar to the one that collapsed on Friday, killing at least 65 people.

Vale said it would cost around $1.3bn to carry out the work over a period of three years, with an estimated impact on production of around 40m tons of iron ore per year. Vale is the world’s biggest producer of iron ore, a key ingredient in the production of steel.

Analysts at SP Angel said the global iron ore market had been “pitched into turmoil” by the announcement, with futures rising more than 9%.

“A sharp reduction in supply could tighten the global seaborne market, aiding rivals Rio Tinto, BHP and Anglo American, while lifting costs for steelmakers,” they argued.

“Vale’s decision could also have dramatic consequences for the global shipping industry, reducing the volume of cargoes carried between Brazil and top user China, as well as to ports in Europe.”

Goldman Sachs said: "Adding to an already tight market, today's announcement is likely to drive iron ore prices significantly higher." It said that losing 40m tons of iron order could send prices as high as $95 a ton.

However, the bank remained optimistic that 40m was a worst-case scenario, with the final reduction potentially coming in closer to 15m tons. "It is important to emphasise the net production loss is unlikely to be 40mt," it argued. "Vale has 450mt of capacity and was targeting 400mt production in 2019. It thus would have enough flexibility to increase production elsewhere to offset the losses in the southern system where the upstream dams are located.”

As at 12.30pm GMT, shares in Rio Tinto and Anglo America were ahead more than 2%, while BHP Billiton's were up nearly 3%.

Vale also said a class action lawsuit had been filed against it in the US. Investors are suing the company, chief executive Fabio Schvartsman and chief financial officer Luciano Siani Pires for “an unspecified amount of damages”. They allege Vale made "false and misleading statements, and omitted to make disclosures, concerning the risks and potential damage of a breach of the dam".

Vale said it would defend itself “vigorously” against the claims.

The dam collapse, at the Feijao mining complex in Brumadinho, is the second one to happen at a Vale mine in recent years. Three years ago a dam failed at a mine jointly owned with BHP, killing 19 people and causing massive environmental damage. Both companies were heavily fined for their roles in what is considered to be Brazil’s worst environmental disaster.

Local courts immediately froze $2.9bn of Vale’s assets following the latest collapse, while the Environmental Protection Agency issued a $66.5m fine. A number of senior Vale managers executives have since been arrested.