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Vale’s Dam Disaster Could Continue to Provide Upside to CLF

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Vale’s dam burst

major disaster struck Vale (VALE) on January 25 when a dam burst at one of its iron ore mine sites in Minas Gerais in Brazil (EWZ), killing at least 230 people.

The Vale disaster impacted the iron ore markets, as it announced it would decommission several projects, and the Brazilian court ordered it to suspend some of its operations. This resulted in a loss of volumes, and as a result, iron ore prices zoomed above $100 per ton. You can read Why Iron Ore Prices Could Have more Upside after Breaching $100 for more on this.

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Iron ore prices soar

Out of the production taken out by Vale, a significant proportion of iron ore pellets was also impacted, which is Cleveland-Cliffs’ (CLF) main product in the US market. 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.”

Goncalves doesn’t see a short or a medium-term solution to these disruptions and expects iron ore prices and pellet premiums to gain even more and stay high for awhile as a result.

Steel prices expected to gain

In addition to seaborne iron ore prices, Goncalves also thinks that steel prices could improve as the new normal in the market gets established.

Seaborne iron ore exporters including BHP Billiton (BHP), Vale (VALE), and Rio Tinto (RIO) form more than two-thirds of the total seaborne iron ore supply. Due to the supply tightness and Chinese steel demand, these miners are reaping the benefits of higher iron ore prices. If steel prices also soar as predicted by Goncalves, domestic steel players AK Steel (AKS) and U.S. Steel (X) could have windfall gains.

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