Vale chief executive Gustavo Pimenta said on Friday that a surge in energy and freight costs linked to the Middle East conflict has made about 10 percent of global iron ore supply unprofitable, and that roughly 15 million tonnes of annual capacity has already been taken offline as a result. The unprofitable share amounts to about 160 million tonnes a year, concentrated among marginal, high cost producers rather than the low cost Pilbara and Brazilian majors.
The comments give the cost side of a price move this site covered on October 15, when Singapore iron ore futures fell below 90 dollars a tonne for the first time in two years. Futures are down about 15 percent this year, pressed by weak Chinese steel demand and growing supply, including the ramp up of Guinea’s Simandou mine. Pimenta argued the price is now below where costs say it should be. “Prices should be today a little higher,” he told Bloomberg Television. “Not because of supply and demand, but because of the impact of freight rates; fuel prices have been higher.”
The mechanism matters for how the market clears. When prices fell in past cycles, freight and fuel often fell with them, cushioning high cost miners. This time the cost floor is rising while the price falls, because war driven energy prices feed directly into mining diesel, explosives and, above all, bulk shipping rates on the long Brazil to China and Australia to China routes. Producers chartering tonnage at spot rates face the full increase; Vale itself is partly insulated by long term charters and its own fleet arrangements, which is one reason the cuts so far sit with smaller rivals.
Pimenta was careful not to call a demand problem. He said Chinese demand remains solid and pointed to growth in India, Vietnam and other steel producing countries, and he expects production cuts by marginal suppliers to rebalance the market and support a price recovery, although he gave no timing. He was also positive on Brazil’s policy outlook ahead of this month’s election, saying both candidates back faster permitting for mining, and reporting on the interview links possible changes to cave protection rules to a planned Vale project of about 50 million tonnes a year.
For investors, the read is that the iron ore adjustment, if it comes, arrives through supply discipline at the top of the cost curve rather than through a Chinese demand rebound. Fifteen million tonnes offline is small against a seaborne market of about 1.6 billion tonnes, but it is the first quantified closure figure from a major producer in this downturn, and it sets the marker to watch in quarterly production reports from mid tier Australian and Chinese domestic miners.