The near-term outlook for iron ore prices could be determined by Brazil’s environmental regulators

Firefighters search for bodies in the region of Corrego do Feijao in Brumadinho, two days after the collapse of a dam at an iron-ore mine belonging to Brazil’s giant mining company Vale near the town of Brumadinho, state of Minas Gerais, southeastern Brazil, on January 27, 2019. – Communities were devastated by a dam collapse that killed at least 37 people at a Brazilian mining complex — with hopes fading for 250 still missing. A barrier at the site burst on Friday, spewing millions of tons of treacherous sludge and engulfing buildings, vehicles and roads. DOUGLAS MAGNO/AFP/Getty Images

Prices for mid and higher iron ore grades spiked on Monday as another accident at a Brazilian mine operated by Vale sparked concern about potential supply disruptions in the period ahead.

As the Commonwealth Bank’s Mining and Energy Commodities Analyst Vivek Dhar explains, whether the subsequent price spike is sustained beyond the short-term may be determined by Brazilian environmental regulators.

Here’s snippet from a research report Dhar sent out which looks at the possible scenarios:

Vale’s tailings dam at its Feijao iron ore mine collapsed over the weekend, leaving 60 people dead and 292 missing. The mine produced around 7.8 million tonnes of iron ore in 2017, after being decommissioned from 2014 to 2016. Output from Feijao is sold onto the seaborne market, accounting for around 0.5% of the traded iron ore market. The closure of the mine is likely given the limited size of Feijao and the cost of rebuilding the burst dam. Seaborne markets will likely be able to absorb the impact, particularly with Vale having the flexibility to offset lost production from Feijao. However, Vale’s ability to offset any lost output is conditional though on the company keeping its mining licences. It is plausible that Vale faces the heavy hand of environmental regulators, especially following a tailings dam collapse at Samarco — a 50:50 joint venture between Vale and BHP — three years ago. We expect iron ore prices to rise sharply in the short term before eventually easing. In the scenario that Vale’s mining licences are suspended, we could see prices remain supported for a prolonged period.