'Prices could lift well north of $100 a tonne': The CBA explains why the iron ore rally may have further to run

KAREN BLEIER / AFP / Getty Images
  • Iron ore prices surged last week following another mining disaster in Brazil.
  • The Commonwealth Bank says supply disruptions to seaborne markets could see the benchmark price spike above $100 a tonne in the near-term.
  • The bank now expects iron ore prices to be significantly higher this year and next as a result of supply uncertainty.
  • It also sees the price premium demanded for higher grade ore leveling off after declining quite sharply in recent months.

Iron ore prices have been on a tear in recent months, sparked in part by concerns over the potential for supply disruptions in seaborne markets following another mining disaster in Brazil in late January.

The spot price for benchmark 62% iron ore fines has surged 33% to $85.53 a tonne since late November, leaving it at the highest level since March 2017.

Higher and lower grades have also rallied, particularly the latter with the price of 58% fines up an astonishing 60% over the same period.

Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, says the rally is unlikely to unwind anytime soon given the potential for lower iron ore output from Brazil.

“A Brazilian court ordered Vale to halt around 30 million tonnes per annum of iron ore production, or around 2% of seaborne supply, at its Brucutu mine to improve safety. The plan is on top of the around 40 million tonnes per annum of iron ore output that will be sidelined as Vale decommissions all of its upstream tailings dams,” Dhar says.

“The Brazilian court order… will likely see iron ore prices spike even higher. Our cost curve suggests that prices could lift well north of $100 a tonne as a result.”

Dhar believes Vale will be able to successfully overturn the mine closure “relatively quickly,” meaning the possibility of a prolonged price spike in coming months is “unlikely”.

However, he says the fallout from the Brazilian mine disaster will see prices remain higher than what would otherwise been the case.

“We upgrade our iron ore price forecast by 19% to $82 a tonne in 2019 and by 9% to $71 a tonne in 2020,” he says.

Given Vale is a major global supplier of high grade iron ore, Dhar says the lower production levels could see recent pullback in the price premium demanded for higher grades stall.

“Vale accounts for around half of the global seaborne trade of high-grade iron ore supply,” he says.

“That could pause the downward trajectory that high-grade premiums have endured since late last year.”

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.