Photographer: Dado Galdieri/Bloomberg

Iron Ore’s Biggest Miner Puts World on Notice as Frenzy Ebbs

  • Vale’s S11D may produce 40 mln tons next year, Alves predicts
  • ‘We’re prepared to operate at any price level,’ Alves says

Iron ore mining giant Vale SA just delivered a stark, three-pronged warning: first, this year’s dramatic run-up isn’t fully justified by the fundamentals; second, watch out as low-cost supply is set to pick up; and third, the Brazilian company is ready to compete at any price level.

“We’ll have to prepare for tougher periods,” Claudio Alves, global director of iron ore marketing and sales at the Rio de Janeiro-based company, told an industry conference in Singapore on Thursday. “The price less than one month ago was more than $70. When you come back three months ago, it was $38. This shows there’s a big volatility.”

Iron ore surged in the three months to April as indications of firmer demand in China helped to ignite a speculative frenzy among local investors. That prompted regulators and exchanges to step into the fray as they tightened rules to quell the outburst and cool prices off. Vale, the world’s top producer, as well as rival Australian BHP Billiton Ltd. flagged prospects for more low-cost supply at the gathering, with Alves saying his company’s 90 million ton S11D project will start supplying ore from the final quarter of 2016.

“We still see some additional capacity coming into the market,” Alves said, forecasting that S11D may produce between 30 million and 40 million metric tons next year, reach 80 percent of capacity by 2018 and full capacity the year after. “This will present some pressure in terms of price,” he said, referring to output expansions industrywide.

Benchmark Prices

Ore with 62 percent content in Qingdao sank 5.8 percent to $53.47 a dry ton on Thursday, according to Metal Bulletin Ltd. Benchmark prices peaked at more than $70 last month and are 23 percent higher this year. Earlier, futures in Asia fell, with the SGX AsiaClear contract losing as much as 2.8 percent, while Dalian prices dropped to the lowest in about a week.

The expansion in low-cost seaborne output may go on to exceed demand growth in the short to medium term, Vicky Binns, vice president of marketing minerals at BHP, told the conference, forecasting an additional 270 million tons of supply between 2014 and 2020. Port stockpiles in China, which have risen 6.2 percent in 2016 even as demand rebounded, may continue to increase through the rest of the year, Binns said.

Cargoes from Brazil will gain about 7 percent to 393 million tons this year, while shipments from Australia rise 10 percent to 846 million tons, Australia’s Department of Industry, Innovation & Science has forecast. The two countries are the world’s largest suppliers of the raw material that’s used to feed China’s steel industry.

‘Retail Frenzy’

“The retail frenzy on Chinese exchanges pushed prices up to unsustainable levels, and we’ve seen prices pull back since tightening measures were introduced,” Jeremy Sussman, an analyst at Clarksons Platou Securities Inc. in New York, said in an e-mail. “Further supply increases in the second half are likely to push prices back to much lower levels.”

Before the unexpected surge in the opening months of 2016, iron ore had retreated for three straight years as rising global supply topped demand just as steel consumption in China started to shrink. Benchmark prices, which rallied to more than $190 a ton in 2011, collapsed 39 percent last year.

“We had a good taste of the kind of volatility that we can experience in the future,” Alves said, adding that Vale’s costs per ton made the company one of the cheaper producers. “We’re prepared to operate at any price level because we’ll be on the left side of the curve.”

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