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Iron ore prices set to stay high but coal exports face problems

The collapse of a waste dam at Vale’s Corrego do Feijao mine in the south-eastern state of Minas Gerais killed around 300 people and led to iron ore prices jumping above $US90 a tonne.

Last week, communities around another Vale mine in Minas Gerais were ordered to evacuate after independent auditors found that another waste dam was in imminent danger of collapse.

Vale has taken a write-down of $US124 million on the Corrego do Feijao mine and expects to make provisions of $US260 million to $US520 million to cover emergency indemnification agreements it made with Brazilian authorities.

Despite this, Vale’s net profit for 2018 jumped by one quarter to $US6.86 billion, although this was less than expected by analysts.

Resources analysts at UBS said the closure of Vale mines and waste dams in the wake of the disaster had taken nearly 93 million tonnes of iron ore out the market.

UBS also said Australia’s big miners were expected to see lower production over the March quarter because of shutdowns caused by Cyclone Veronica last week.

The investment bank’s head of resources research Glyn Lawcock said UBS had increased its iron ore price forecasts to an average price of $US83 a tonne in 2019 because of the shortfall in the market, which he expected to hit home next month when Chinese port stocks dwindle.

UBS originally expected average iron ore prices of $US65 a tonne for 2019 before the mine disaster in Brazil.

Higher prices will boost the Federal Government’s coffers, with the federal budget last year and December’s mid-year update both estimating an iron ore price of $US55 a tonne.

Treasury said that every $US10 a tonne increase above that price was worth an extra $1.2 billion in revenue this year and $3.6 billion in 2019-20.

Mr Lawcock said it was unlikely that big miners like BHP and Rio Tinto would increase iron ore production to cover the shortages because of the cost of expansion and the three to five years needed to expand infrastructure and get the necessary approvals.

“I think that’s why we are not seeing the supply side, the companies that we cover, rush to invest,” Mr Lawcock said.

Chinese steel mills are expecting to get more iron ore from South-East Asia, India and Africa.

Coal delays continue in China UBS also said restrictions placed on Australian coal imports were being driven by Beijing’s desire to ensure the profitability of the Chinese coal industry as well as ongoing production restrictions to protect the environment.

Processing of Australian coal imports has been delayed from around 20 to about 40 days and UBS said it got no clear sense of the policy directive or any change from its recent visit to China.

It has kept its forecast for thermal coal prices, used in power generation, at $US95 a tonne for the year and has lifted its hard coking coal (used to make steel) forecast from $US175 a tonne to $US198 a tonne this year.

Mr Lawcock said the restrictions on coal imports were likely to keep prices volatile and to last until June, when demand for cooling increases over summer in China.

“China is very cognisant of their domestic coal industry, it’s a very large domestic coal industry when it comes to thermal and it’s about essentially maintaining the price that keeps the industry financially afoot,” Mr Lawcock said.

He said thermal coal prices could fall, which is putting pressure on the share prices of miners like Whitehaven Coal.

China caps annual coal imports at around 270 million tonnes.

Mr Lawcock said commodity prices were more and more being determined by government policy in importing countries like China and Indonesia.

“What differentiates this cycle from every other cycle we’ve lived through is generally high prices reflect strong demand. Today high prices generally reflect restrained supply, whether voluntarily, environmentally or structurally,” Mr Lawcock said.

UBS does not expect major spending by the big miners, because of China’s slowing economy and supply constraints.

Instead miners will continue to focus on returning cash to investors.

Fortescue Metals paid a special dividend to investors ahead of planned changes to franking credits if Labor wins the upcoming Federal election.

UBS said a resolution to the trade war between the US and China would also boost most commodity prices this year, as well as continued stimulus spending by China.

Source: ABC Net

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