BHP and Vale enjoy boom in iron ore demand

BHP, the world’s biggest miner, said its flagship iron ore business had made a strong start to its new financial year, as Brazilian rival Vale reported a sharp increase in production of the key steelmaking material.

The Anglo-Australian group said it had churned out 74m tonnes of the rust-coloured raw material in the three months to September, putting it on course to beat full-year targets of 276m to 286m tonnes.

Vale, meanwhile, said it had dug up more than 88.6m tonnes of the commodity in the same period, up more than 30 per cent on the previous quarter and its strongest output since a deadly dam collapse in 2019 that killed 270 people and significantly reduced the company’s production.

Iron ore has been the best-performing commodity of 2020, rising 28 per cent to a seven-year high of about $120 a tonne on the back of booming demand in China and supply disruptions in Brazil, which has been hit hard by the coronavirus pandemic.

That has generated huge profits for BHP and Vale as well as other big producers including Rio Tinto and Fortescue Metals Group, which can dig the material out of the ground for less than $15 a tonne. 

However, if Vale can maintain its production rate of almost 1m tonnes per day and rivals continue to operate without any disruptions, prices could come under pressure. 

There are also signs that demand is starting to soften in China, where port stocks have started to tick up and restocking by steel mills has been disappointing since the Golden Week holiday in early October. Traders are also worried that restrictions could be imposed this winter on big producers in Tangshan, the country’s top steelmaking city.

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“Vale showing they can operate at these rates of production for a sustained quarter is likely to be negative for consensus iron ore [price] forecasts,” said Tyler Broda, analyst at RBC Capital Markets. “This said, we continue to see potential for deficit iron ore markets in 2021 should Chinese steel growth stay even modestly positive.”

Vale’s production suffered in the second quarter when it was hit by the full impact of the pandemic, wet weather and maintenance at its huge S11D mine in the Amazon rainforest.

Although sales have continued to lag behind output because of restocking, analysts now reckon Vale will achieve the low end of its full-year production guidance of 310m to 330m tonnes, something that had looked unlikely earlier in the year.

“We expect production to continue to ramp up in 2021,” said Christopher LaFemina, analyst at Jefferies.

Speaking at the FT Commodities Mining Summit on Friday, Vale chief executive Eduardo Bartolomeo said he expected the company to be producing 400m tonnes of iron ore a year by the end of 2022 or early 2023.

“It’s totally in our hands,” said Mr Bartolomeo. Before last year’s Brumadinho dam disaster in Brazil, Vale produced 385m tonnes.

He also said Vale had the ability to add more tonnes to the market if they were needed by customers in China, who are threatening to throw their weight behind the development of the giant Simandou iron ore deposit in Guinea.

“It’s hard to make a judgment around Simandou but I can tell you Vale is able to supply the market with volume and quality . . . sooner rather than later,” Mr Bartolomeo said.

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Speaking at the same event, Fadi Wazni, head of a Chinese-backed consortium looking to develop half of Simandou, said a mine producing 60m to 80m tonnes a year could be up and running in 2025.



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