Brazilian regulators have been slow to let the miner reopen operators that were shuttered after a dam disaster that killed hundreds.
Heavy rain cruelled production in the early stages of 2020, and then the coronavirus disrupted Vale’s supply channels.
Vale was supposed to ship up to 73 million tonnes in the March quarter but could manage only less than 60 tonnes.
In April, it downgraded total production to between 310 and 330 million tonnes in 2020, which is lower than the 346 million it produced in 2015.
And that was before the coronavirus hit Brazil hard. UBS analyst Glyn Lawcock said on Thursday that it was important to note that news reports were suggesting the outbreak had shifted from Brazil’s large cities to its smaller towns, with a hotspot emerging in the state of Para, in the country’s north.
This state is responsible for 35 per cent of the nation’s iron ore supply, and a staggering 23 per cent of world supply. It’s unlikely we’ll see a quick improvement in the level of infection – Lawcock says Google mobility data suggests adherence to stay-at-home measures in Brazil is low.
Reports also indicate that the healthcare system in some parts of the nation is heartbreakingly under-resourced. Little wonder then that many Brazilians are becoming increasingly incensed at the attitude of President Jair Bolsonaro, who has consistently played down the threat posed by COVID-19.
On the other side of the coin, demand from China has remained robust despite the coronavirus disruption. And, of course, it is likely to remain strong as the country tries to lift economic growth during its COVID recovery phase.
It is this supply-demand equation that has kept iron ore prices robust; the price smashed back through the $US90 barrier on Wednesday night to $US91.67 a tonne; that’s higher than it was in mid-January.
If China was to turn away from Australian iron ore producers and towards a weakened Brazilian industry, the price would rocket. This would, in turn, send the price of Chinese steel through the roof and damage the nation’s nascent economic recovery.
The Chinese government is simply too smart to risk that.
But mining insiders believe China might be prepared to tinker with Australian coal imports as part of this diplomatic spat.
It was in February last year that the first reports of Chinese customs officials banning Australian coal imports first emerged. At first, it appeared some coal shipments had been rejected on environmental grounds; it was later confirmed that some shipments were held at port for 45 days. Quotas on coal imports – from Australia and other nations – extended through most of the year.
Industry sources suggest China could step up coal restrictions again without damaging its economy, because there are far more alternative suppliers of coal around the world that it could turn to.
Any sort of ban on Australian coal imports into China would represent a worrying and dramatic increase in the tensions between the two nations. It would also be another blow for coal exporters, who have seen the spot price of metallurgical coal used in steelmaking fall by about 30 per cent since February.
But it wouldn’t hurt nearly as much as a slump in iron ore exports would – for investors as well as for state and federal tax coffers.