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Iron ore prices surged amid supply disruption; as the recent ban on Vale, the world's top producer of the steel raw material, is supporting the prices of iron ore. High demand for steel is another factor for the surge in iron ore prices. Recently, close to 5% rise was seen in the ore with 62% iron content as the same touched over $90 per ton. Reason for the rise in price was mainly due to the ban imposed on key producer. After the dam collapse incidence in the state of Minas Gerais emerged killing almost 150 people, the operation of Vale's Brucutu mine was halted, which in turn is expecting to knock out nearly 30M metric tons/ year out of the supply side of iron ore.
How will it impact Rio Tinto and others on ASX? Â
As the worldâs number one iron ore producer; Vale is out of the equation, it is worth looking at the performance and expansion capabilities of the world's number two and number three iron ore producers. The increase in iron ore price can deliver a boost to Rio Tinto (ASX:RIO) and BHP (ASX:BHP) to expand their production capabilities. Another boost for these two companies is the disruption in the supply chain of steel due to the recent suspension of steel mills in Xuzhou provinces of China and aggressive expansion from the competitors to take advantage of the disrupted supply chain in the steel market. The China service sector continues to expand irrespective of the slowdown in China, creating demand for high-grade steel and steel products. The competitors of suspended steelmakers are expanding their operation amid high demand for steel in the present status quo in the global and domestic market. This expansion is enhancing the demand for raw materials like iron ore and coking coal that are used for steelmaking purposes. The suspension of Xuzhou steel mills was due to the environmental issue and China's s stance to curb its pollution, and this puts focus on the use of high-grade iron ore during steel making.
In the absence of Valeâs activity and its iron production, major iron-ore producers like Rio Tinto and BHP can step up to cater to the supply disruption and take advantage of the higher prices. Similarly, with eighteen steel plants located in the area of Xuzhou serving the suspension and which in turn is knocking out 60,000M tons/day out of steel supply side, the iron ore miners in Australia are expected to benefit.
The recent upgrade by Moody's credit rating on Rio by one notch to A2 from A3 is suggesting that the company is in the position of taking advantage of high prices of the commodity. As per the Moody's lead analyst on Rio Tinto, Carol Cowan the miner's efforts to cut its debt load over the last five years has helped the company strengthen its balance sheet. The dumping of its progressive dividend policy which held that shareholder payments would remain steady or rise every year has positioned the company better to take advantage of the surging iron ore prices.
Looking over to the disruptive supply chain in iron ore ANZ has now revised their previous forecasting of 15 million tons surplus of iron ore in the market to a production deficit.
The overall situation has started looking favourable and the market now eyes the iron ore price to touch $100 per ton in the near term.
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