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Steel mill margins under pressure as stockpiled iron ore becoming more attractive

Steel News - Published on Fri, 08 Feb 2019

Image Source: Financial Express
As has been widely reported, Vale has declared force majeure on an undisclosed number of contracts. This decision has reportedly come as a direct result of the Brucutu mine / Laranjeiras dam closure (which will result in an annual loss of 30 million tons of production for as long as the closure remains in effect). After the previous separate announcement that 40 million tonnes per year would be lost due to the decommissioning of other dams, Vale originally reported that no force majeure would be needed and that the first 40 million tonne disruption would be partially be offset from other production. However, the more recent Brucutu / Laranjeiras disruption is proving to have more negative consequences for Vale and Brazilian iron ore trade prospects.

Vale is fighting the Brucutu / Laranjeiras closure, and some of the production loss here is also expected to be offset from other production, but for now this is a very significant issue that Vale and the global iron ore and steel markets are facing. Of note is that last week, alone, iron ore prices increased week-on-week by approximately 13%. Steel prices during the same period remained basically steady. Now, though, iron ore prices are likely to rise even further. This great divergence of iron ore prices compared with steel prices is putting significant pressure on steel mill margins and is also helping to make iron ore currently stockpiled in China and elsewhere more attractive compared to new seaborne cargoes. This issue, along with the very fact that overall Brazilian iron ore production is now most likely to contract this year (if the Brucutu / Laranjeiras disruption remains in effect) are negative issues for the dry bulk market. These issues will be discussed in greater detail in Commodore Research’s next Weekly Dry Bulk Report and Weekly China Report.

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Posted By : Ratan Singh on Fri, 08 Feb 2019
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