The world’s biggest iron ore producer said prices for the steel ingredient will be hit as the coronavirus pandemic tips the global economy into recession.
In a briefing with analysts late on Tuesday, Luciano Siani Pires, Vale chief financial officer, said weak demand from steel mills outside China would offset supply disruptions in the rest of the world, potentially denting prices, which have been remarkably resilient this year.
Iron ore has averaged almost $90 a tonne recently, according to S&P Global Platts, helping some of the world’s biggest natural resources companies to emerge relatively unscathed from the economic chaos unleashed by the spread of the virus.
However, analysts are growing increasingly concerned about slowing demand in Europe and also China. Over the past week iron ore has fallen 6 per cent to a six-month low of $82 a tonne. Analysts at Citigroup project that prices will fall a further 17 per cent to $70 in the coming weeks.
Mr Siani told analysts that iron ore prices had held up in the first quarter of the year because of a combination of lower production from Australia and Brazil and falling supply from domestic mines in China, which is starting to normalise.
Price-supportive supply problems persist, because of lockdowns to prevent the spread of the virus in mining locations. But this is now being offset by lower demand in Europe, South Korea, Japan and the US.
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In Europe, almost 15m tonnes of steelmaking capacity has been idled, according to Vale. The US has cut 5m tonnes of capacity, while Japan has cut 3.3m.
“Demand in China appears to be returning; the main concern is now on Europe, Japan and Korea where the demand destruction is significant, blast furnace closures are occurring and some material is being resold,” said Tyler Broda, analyst at RBC Capital Markets. “They [Vale] expect prices to come under pressure with demand destruction outweighing supply cuts.”
Iron ore is the main source of income for Vale and rivals BHP Group, Fortescue Metals Group and Rio Tinto.
These companies, which can mine the steelmaking commodity for less than $15 a tonne, have generated huge profits over the past year as the price has surged as high as $120 a tonne following a string of supply disruptions and strong demand from China, the world’s biggest consumer.
Vale’s output fell a fifth last year to 302m tonnes after the Brazilian miner was forced to close several mines following a deadly collapse that claimed the lives of more than 250 people.
The company is targeting annual production of 340m-355m tonnes this year, but achieving that goal will depend on obtaining regulatory permits to restart 30m tonnes of shuttered capacity.
Assuming Vale reaches its target and Beijing does not launch a big stimulus package to boost economic growth, most analysts expect iron ore prices to weaken from current levels.
One reason is faltering demand from an increasingly overstocked steel industry in China, which continued to churn out metal during its coronavirus crisis, as well as the downturn in industrial activity in the rest of world.
“China’s physical steel market glut will probably send steel lower and take iron ore with it,” said analysts at Citi.