Brazil behind Australia is the second largest iron ore producing country of the world. About 70% of Brazil’s iron ore is exported to East Asia and about 15% to European countries. Brazil is producing the highest quality iron ore of the world. It is important to note that in 2018 the average Fe content of Brazilian iron ore exports was 64.5% while the same figure for Australia as the first producer of iron ore in volume was 59.5%.
Vale is the leader producer of iron ore, pellets, and raw materials that are required to manufacture steel. Vale mines and pelletizing plants are concentrated in Brazil. Moreover Vale has a pelletizing plant in Oman and stakes in joint ventures in China that manufacture pellets. About 90% of the Brazil’s iron ore production is related to Vale and it is the largest pellet producer of the globe.
On 25 January 2019 Vale’s dam broke. Exactly three years and two months after Samarco’s dam accident on November 2015, it repeated again on Vale’s Feijão’s dam. Vale as the world’s largest iron ore producer saw the collapse of one of its tailings dams. While the Samarco disaster dumped about five times more mining waste, Feijão’s dam collapse has already killed much more people. China as the main importer of Vale’s product is concerned of iron ore supply, especially higher grades of iron ore after this disaster. Chinese steel mills have preferred high-grade iron ore as it permits them to maximize output from their blast furnaces and also limit the amount of coal used and reduce the air pollution created per MT of crude steel produced.
Chinese steel mills have three ways in this special situation. The first way is to substitute higher-quality iron ore with lower grades, likely to be more available in the market but it will result in lower output. In this situation more ore is needed to make the same amount of steel and therefore more coking coal is required which increases the costs and may cause problems with ecology authorities that are trying to control the air pollution.
The second solution is to continue using high grade iron ore but decline the production to make the costs more stable which may not be appealing for steel makers given the recovery in steel prices. The third and the last option is to keep production steady by applying high grade iron ore but enter a kind of bidding war against each other to secure the sufficient supply. This only work if profit margins remain strong and it will require steel prices to increase in tandem with iron ore rates.
Also Australian miners are likely to increase a few more MT to the market by the second half of 2019 but it may happen if the price of iron ore is sustainable. South Africa as the third-biggest supplier of iron ore to China behind Australia and Brazil is unlikely to add significant volumes to the seaborne market as of capacity constraints though its higher-grade iron ore may have willing buyers.