The sharp rise in iron-ore prices to over $90 per dry metric ton (dmt) from under $75/dmt since January, may be “more structural than initially anticipated”, says Fitch Ratings.
It believes sustained iron-ore prices of above $85/dmt over the next 9 to 12 months should provide cash flow windfalls for global iron-ore producers across the company’s rating portfolio through 2020.
It adds that the credit profiles of iron-ore producers could benefit, depending on how they use that cash.
Additionally, the ratings agency states that elevated iron-ore prices will also help support Vale's fundamentals following the Brumadinho tailings dam collapse in January, which affected production and elevated legal and regulatory risks.
A tighter supply following the Vale dam collapse and subsequent idling of mines across Minas Gerais, Brazil, as well as tropical cyclones in Australia, have put upward pressure on iron-ore prices.
In Australia, Fortescue Metals Group announced in March that it had resumed shipments less than a week after port disruptions and that it was working with customers to reschedule shipments. Rio Tinto and BHP have, however, both confirmed that their iron-ore output for this year would be lower owing to the storms, Fitch says, estimating that Australian producers could lose up to a combined 25-million metric tonnes of production this year.
“Our iron-ore price deck for rating purposes currently stands at $75/dmt for 2019. We expect some of the supply tightness and market dislocation to be transitory, the gap of lost production to narrow and the price of iron-ore to soften in second-half of 2019,” the agency says.
It further notes that the state court of Minas Gerais' decision on Wednesday to partially suspend its injunction halting Vale's Brucutu mine production signals the return of some volumes.
However, Fitch warns that recent heavy rains in northern Brazil have affected some production in Vale's Northern System. Vale has, meanwhile, reaffirmed its 2019 sales guidance of between 307-million and 332-million metric tonnes.
Meanwhile, additional disruptions and continued healthy demand from China, which represents around 60% of global iron-ore consumption, following government stimulus measures, will support pricing, Fitch says.
Stimulus measures include reducing value-added taxes, lowering reserve requirements to entice further credit and consumer spending and promoting further infrastructure development.
The absence of significant volumes from projects in 2019 and 2020 should also provide price support.
Some of these projects include Vale's continued ramp up of S11D, its low-cost high-grade iron-ore operations in northern Brazil, which could produce up to 80-million metric tonnes in 2019 and reach nominal capacity of 90-million metric tonnes by 2020.
Anglo American's resumption of its Minas-Rio iron-ore operations in Brazil could also add an additional 16-million to 19-million metric tonnes of supply this year, but production into 2020 is dependent on the group’s ability to secure an operating licence to lift its tailings dam wall by 20 m.