Vale’s decision to cut production could leave the market short of supply
Thursday 07 Feb 2019 Author: Daniel Coatsworth

Iron ore prices have risen by 15% since a dam collapsed at one of Vale’s iron ore mines in Brazil on 25 January.

The Brazilian company will halt 40m tonnes of production, equal to 10% of its annual production, in order to decommission dams similar to the one that burst.

That has prompted some analysts to say the market now needs extra supply from the seaborne market in order to meet anticipated demand, in turn driving up the iron ore price.

‘Iron ore remains an efficient market and higher prices should come this to market quickly,’ says BMO analyst Colin Hamilton.

London-listed beneficiaries of higher iron ore prices include BHP (BHP), Rio Tinto (RIO) and Anglo American (AAL).

Shares in Brazil-listed Vale have fallen by nearly 19% since the accident happened even though the subsequent rise in iron ore prices should boost its earnings.

‘Despite the production cuts and after applying high level estimates of restitution costs, Vale shows the greatest improvement in earnings amongst the peers,’ says BMO analyst Edward Sterck.

‘However, we think investors will largely look past this, with many applying an environmental, social and governance rather than financial overlay given the horrendous human cost of the disaster.’

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