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Will Iron Ore Breach $100 in the Wake of Vale’s Dam Collapse?

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Vale’s dam burst

Following Vale’s (VALE) dam collapse on January 25, iron ore prices have been rising. On February 7, prices reached nearly a two-year high. On January 30, Vale announced that it was decommissioning all dams built by the upstream method.

This entailed a loss of 10%, or 40 million tons, of its iron ore production. A part of this production, however, is expected to be made up of other systems.

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Loss of production

The potential iron ore supply situation tightened further on February 4, when a Brazilian (EWZ) court ordered Vale to suspend its mining operations at its Brucutu mine, its largest mine in Minas Gerais state. This suspension could cause a loss of ~30 million tons of iron ore production for the company. Vale’s iron ore production is vital to the overall seaborne iron ore market, as it’s the largest iron ore producer in the world and was expecting to produce ~400 million tons of ore this year.

Clampdown continues as iron ore surges

In a series of restrictions, a civil court has restrained Vale from disposing of tailings at eight of its mines. The clampdown on Vale isn’t expected to end anytime soon. According to a report in the Wall Street Journal on February 6, inspectors warned the dam’s owners about a potential risk due to faulty water drainage and monitoring systems. This could result in further restrictions on the miner.

The effects of the disaster and the ensuing restrictions have caused iron ore prices to skyrocket. Vale’s peers (XME) BHP Billiton (BHP), Rio Tinto (RIO), and Cleveland-Cliffs (CLF) are rising due to the perceived impact on iron ore production and the resultant higher iron ore prices. We’ll discuss this in more detail in the next article.

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