China steel demand leaves iron ore miners Vale, Rio Tinto struggling to keep up
- Brazil’s Vale SA churned out less ore than expected last quarter after lower productivity at one mine and a ship loader fire
- Rio Tinto Group’s shipments were disrupted by wetter-than-average weather at its Pilbara operations in Western Australia
The world’s top two iron ore miners struggled to keep up with strong Chinese demand in the first quarter of 2021, hit by operational challenges and weather disruptions, in a positive sign for prices that are already at decade highs.
Brazil’s Vale SA churned out less ore than expected last quarter after lower productivity at one mine and a ship loader fire, with its recovery from an early-2019 tailings dam disaster proving a little slower than expected. Rio Tinto Group’s shipments were disrupted by wetter-than-average weather at its Pilbara operations in Western Australia.
“With the market relatively tight at the moment, it will certainly see any failure to meet current guidelines as relatively positive for the price,” said Daniel Hynes, senior commodities strategist at ANZ Banking Group.
Why is securing new sources of iron ore so vitally important for China?
Vale and Rio both maintained their forecasts for full-year production, though a slower-than-expected recovery at Vale could see the market reset its expectations, he said.
Rio cautioned that its guidance for annual output of up to 340 million tonnes was subject to logistical risks associated with bringing 90 million tonnes of replacement mine capacity on stream. It also said that Tropical Cyclone Seroja had impacted its Pilbara mine and port operations in April.
It was a “mediocre quarter” for Rio, Tyler Broda, mining analyst at RBC Capital Markets, said in a note. Quarterly production was 6 per cent less than the bank’s estimate, he said.
Not all that much is going in the right direction from a bottom-up basis for Rio Tinto as they continue to tackle the various challenges at their operations and projects, but main commodities iron ore and aluminium are both benefiting from the China decarbonisation theme
Iron ore futures in Singapore rose as much as 3.7 per cent to US$182.80 a tonne before trading at US$182.75 by 2.48pm local time. Prices in Dalian gained as much as 4.7 per cent, while hot-rolled coil and rebar both rose in Shanghai. Rio Tinto’s shares settled 0.5 per cent lower in Sydney.
Steel prices in China finished the quarter at decade highs as construction activity and demand in the first quarter exceeded both 2020 and 2019, Rio said.
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Will iron ore be dragged into the ongoing China-Australia trade conflict?
However, he added the cost of ore was now well above fair value, with the risk of a pullback later in the year if Beijing’s plans to curb steel production to control greenhouse gas emissions start to impact on demand.
“If we saw a 1 per cent fall in Chinese steel production that would potentially wipe out about 15-20 million tonnes of iron ore,” said Hynes.
