Vale declares force majeure

Brazilian miner Vale has declared force majeure on some iron ore contracts after a court ordered a halt to mine operations following the bursting of a dam on January 25th which killed upwards of 300 people.

Vale received a court order to halt another 30m tonnes of iron ore production, which was in addition to the 40m tonnes of production which was planned to be decommissioned because of the dam collapse.

Joakim Hannisdahl, head of research at Oslo-based Cleaves Securities told clients that there remained a considerable degree of uncertainty concerning the extent to which Vale’s iron ore production would be affected and how much spare production capacity Vale had. Also unclear was how long the disruption would continue and how much iron ore inventories could be exported amidst temporary production cuts.

However, he said that “what is certain is that this developing black swan story comes at a time when the dry bulk market is already facing seasonal headwinds relating to Chinese New Year / Golden Week from February 4th to 10th, the Australian cyclone season and the Brazilian rainy season.”

It was estimated that the originally stated 40m tonne iron ore production cut could remove 1.3% of dry bulk shipping demand. Adding the next 30m in halted production increased this estimate to 2.3%

Australian suppliers were expected to ramp up production because of the increase in prices, but Chinese steel mills  were expected to continue to draw on inventories and increase scrap steel input, rather than pay the higher iron ore prices.

Global iron ore prices jumped week-on-week by approximately 13%, while steel prices during the same period remained steady. Overall the impact was expected to be negative for the dry bulk market.

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