blog

Latest from the Quantamize Blog

Vale Dam Disaster Sends Iron Ore Market Into a Frenzy

Jan 31, 2019

 

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

 

  • The spotlight is on Vale SA (BOVESPA: VALE3) and the iron ore industry this week after a dam owned by the world's largest producer of iron ore burst on January 25th, 2019 and resulted in 99 people dead and 259 others missing, as of January 30th.  The collapsed dam, located in Brumadinho, Brazil, may remind investors of a similar tragedy that occurred in November 2015 when a dam collapsed in Mariana, Brazil, and killed 19 people while wiping out the entire town -- that dam was partially owned by Vale as well.
     
  • As can be seen in the chart below, Vale shares observed the largest single-day drop in their history (14.77%) and wiped out USD$18bn in market cap value on news that the company’s dam collapsed.

 

Source: Bloomberg

  • Vale announced a suspension of its dividend payments to investors indefinitely on January 27th, 2019 as a result of the dam bursting. 
     
  • A few days later on January 30th, 2019, Vale announced that it will decommission some of its dams, a move that will result in an iron ore production cut of up to 40mm tons/year. Additionally, Vale announced it will delay the release of its production and earnings report until March 2019.  
     
  • As can be seen in the chart below, the dollar price per ton of iron ore has soared 8.37% since January 25th, 2019. More specifically, the price per ton of iron ore jumped 2.83% on January 30th, 2019 following the news of Vale’s production cut. 

 

Source: Bloomberg

  • News of Vale’s production cut worked to benefit other iron ore miners, however. A tighter supply of iron ore will result in stronger pricing power for iron ore producers, driving more profitable business. Analysts issued a slew of upgrades and price target hikes for the stocks of iron ore producers immediately following news of Vale’s production cut.
     
  • Analysts across the commodities industry maintain a wide variety of outlooks for iron ore markets. Capital Economics, for example, told clients it sees the price per ton of generic iron ore climbing as high as USD$100 in the short-term. However, Capital Economics firmly believes that a, “dismal demand outlook,” will cause generic iron ore prices to fall through 2019 and sink to USD$65/ton by year’s end.

 

We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.
We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.