Iron ore demand drives profits from the world’s largest mining companies

October 20, 2020

Thanks in part to booming demand from China as well as disruptions to the supply chain from Brazil, iron ore has been the best performing commodity of 2020 with prices reaching $120/t ($108/st), a seven-year high.

With those prices, the world’s largest suppliers of iron ore, BHP and Vale has increased their production. BHP said it flagship iron ore business has had a strong start and that is has produced 74 Mt (81.5 million st) of iron ore since September, putting it on course to beat full-year targets of 276 Mt to 286 Mt (304 million st to 315 million st).

Vale had produced more than 88.6 Mt (97.6 million st) of the commodity in the same period, up more than 30 percent on the previous quarter. 

The Financial Times reported the prices for iron ore have 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/t ($13.6/st).

However, if Vale can maintain its production rate of almost 1 Mt/d (1.1 million stpd) 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.

Vale’s production suffered in the second quarter when it was hit by the full impact of the COVID-19 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 310 Mt to 330 Mt (341 million to 363 million st), something that had looked unlikely earlier in the year.

Speaking at the FT Commodities Mining Summit on Friday, Vale chief executive Eduardo Bartolomeo said he expected the company to be producing 400 Mt (440 million st) of iron ore a year by the end of 2022 or early 2023.

“It’s totally in our hands,” said Bartolomeo. Before last year’s Brumadinho dam disaster in Brazil, Vale produced 385 Mt (424 million st).

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,” Bartolomeo said.

 

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