Pellet premiums to soar
During Cleveland-Cliffs’ Q1 conference call, CEO Lourenco Goncalves said, “Several people directly or indirectly involved with the industry initially believed that the lost production in Brazil would not be meaningful and would be easily replaced or brought back online. That did not happen and will not happen.”
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Vale’s dam burst
Investors might recall that a major disaster struck Vale (VALE) on January 25, with a dam rupture at its iron ore mine in the Brazilian state of Minas Gerais (EWZ) killing more than 300 people. Since then, there has been a major supply disruption at the mine due to several injunctions and Vale’s plans to decommission all upstream dams. When the company released its Q4 2018 results, it estimated volumes to be 75 million tons lower than it had previously expected.
Vale is also the world’s largest producer of iron ore pellets, CLF’s main product in the United States (SPY) (DIA). Due to these disruptions, Goncalves expects iron ore prices and pellet premiums to gain even more and stay high for awhile, and believes that there is no short- or medium-term solution for these shortages.
Steel prices expected to gain
Goncalves also believes that steel prices could improve with the establishment of the new normal, letting US steel mills increase the price of steel.
Vale’s direct competitors in the seaborne iron ore market, BHP (BHP) and Rio Tinto (RIO), are also benefiting from seaborne iron ore prices (XME) rising due to a perceived and actual supply shortage. If steel prices also soar as predicted by Goncalves, domestic steel players AK Steel (AKS) and U.S. Steel Corporation (X) could have windfall gains. For more on Vale, read Will Iron Ore Prices Breach $100 in the Wake of Vale’s Dam Collapse?