Could the Recent Supply Disruptions Help Iron Ore Prices?

The Roy Hill project

The $10 billion Roy Hill project, which will have a total capacity of 55 million tons per annum, was originally slated to come online in September 2015. The project has been beset by delays, pushing the deadline further out. Now, the most likely estimate is for it to come online in early 2016.

Could the Recent Supply Disruptions Help Iron Ore Prices?

According to Colin Barnett, Premier of West Australia, “I suspect it probably would be early next year, but that is my guess.” He added, “[It is] a $10 billion project; a mine, a railway, a port and then all the equipment has to be commissioned, they have to get the safety regimes in place and any of these projects take a long time.”

This project was expected to start exporting iron ore volumes in the seaborne trade in 4Q15, which would have been a further negative for the already oversupplied market. However, the delay helps the short-term fundamentals remain as is, and we suspect it will not be long before these tons hit the market. Overall, this seems to be a short-term positive. The above chart shows the estimated capacity expansions of iron ore miners, including the Roy Hill project.

Samarco accident

Samarco, which is BHP Billiton’s (BHP) (BBL) and Vale SA’s (VALE) 50:50 iron ore joint venture in Brazil, suffered a tailings dam failure on November 5, 2015. After the accident, the operation was closed indefinitely. Most industry experts believe it will take two to three years for the operation to come online again, given the legal and environmental issues involved. The operation produced 24 million tons of iron ore pellets in 2014 and was expected to produce ~30 million tons in 2015.

The output from Samarco contributes ~2% of the global seaborne iron ore market. So, the impact of the production loss from this operation should not be enough to move the needle up on iron ore prices. In the meantime, iron ore miners such as Rio Tinto (RIO) and Cliffs Natural Resources (CLF) should continue to battle with weak iron ore prices. Cliffs forms 0.05% of the Vanguard Materials ETF (VAW).