Inclement Weather Halts Most Iron Ore Shipments, Will Boost Iron Ore Prices

An impending cyclone in Australia and heavy floods and landslides in Brazil have forced mining majors such as Rio Tinto (NYSE:RIO), Vale, BHP Billiton and Fortescue Metals Group to halt iron ore shipments. This will provide a short term boost to iron ore prices in the first few weeks of January. ^[1]

Key ports and mines in the resource-rich Pilbara region of Australia have been closed as Cyclone Christine is expected to hit the region hard in the next few days. Winds exceeding speeds of 200 km/hour and storm tides are expected when the cyclone makes landfall. In Brazil, Vale has declared a force majeure on iron ore shipments after floods and landslides in the Espirito Santo state affected the rail transportation system and port operations. Force majeure is a legal clause that exempts companies from penalties and liabilities when a disruption in promised deliveries occurs owing to an event or events outside the companies’ control. ^[2]

We have a Trefis price estimate of $55 for Rio Tinto, which is in line with the current market price.

See Full Analysis for Rio Tinto Here

The Impact On Iron Ore Shipments In Australia

Australia is the world’s biggest producer of iron ore which is mined majorly by Rio Tinto, BHP Billiton and Fortescue Metals and supplied to steel mills in China. The country alone is expected to account for about 52% of the world’s global seaborne supply of iron ore this year, according to Morgan Stanley.

The impending cyclone has forced these companies to suspend operations at the ports of Hedland, Dampier and Cape Lambert in western Australia. Port Hedland is the world’s largest iron ore export terminal and is used majorly by BHP Billiton. About 252 million tons of iron ore were shipped from Port Hedland in 2012. Rio Tinto has a combined annual export capacity of 225 million tons at its Dampier and Cape Lambert terminals. The three ports together account for about 500 million tons of iron ore exports. Therefore, shipments of millions of tons of iron ore stand suspended until the cyclone blows over. ^[3]

What could be a matter of greater concern for Rio Tinto and other companies is the potential impact on railway systems. If the cyclone causes enough destruction to impede transportation via railways, the ore will accumulate at the pitheads and the suspension of exports will get prolonged. In the worst case, the cyclone could hit the pits themselves which will put a stop to mining operations as well.

The Problem In Brazil

Heavy rainfall has resulted in floods and landslides in southeast Brazil, especially in the state of Espirito Santo. This has caused some parts of the Southeastern System of Vale’s railway network to shut down, thus affecting the company’s iron ore transportation capacity and operations at the Tubarao port. According to Vale, about 3 to 4 million tons of iron ore shipments will be impacted in 2013 itself. If the situation doesn’t improve, there could be further impact going into 2014. On the other hand, if shipments resume soon, up to 2 million tons of the current estimated impact can be potentially reversed. ^[4]

The combined impact of setbacks to production will support higher iron ore prices in the first few weeks of January. Considering that more iron ore supply than an expected increase in demand is likely to enter the market next year, average prices could be lower in 2014. Therefore, any short term boost to iron ore prices would be welcome to Rio Tinto, Vale and other iron ore miners.

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1. Strengthening cyclone sets path for Australia iron ore mines, Reuters [↩]
2. Australia Iron Ore Exports Curbed as Cyclone Approaches, Bloomberg [↩]
3. Australia’s iron ore, gas-rich northwest braces for cyclone, Reuters [↩]
4. Vale declares force majeure on iron ore shipments, Vale Press Release [↩]