Iron ore prices may extend gains from 16-month highs this week as forecasts predict a "severe" tropical cyclone crossing Australia's northwestern coast on Tuesday or Wednesday, possibly halting exports of the steel-making ingredient to Asian consumers and curtailing production in the Pilbara mining region.
A tropical low off the northwest coast is likely to develop into a cyclone late on Sunday or early on Monday, the Australian Bureau of Meteorology's Perth-based Tropical Cyclone Warning Center said in an update issued at 11:29 a.m. local time on Sunday.
The system will continue to intensify on Monday "and there is a high risk that it will cross the coast as a severe tropical cyclone on Tuesday or Wednesday," the bureau said.
ANZ warned in a daily market report on Friday that"potential weather-related disruptions" affecting the Pilbara and its iron ore export terminals may support iron ore prices. "The biggest problem is if there's any lasting damage to port or rail infrastructure," said Nick Trevethan, ANZ's senior commodity strategist. "That will have far more significant implications."
The potential destructive power of the current cyclone -which forecasters say could build into a Category 3 system as early as Tuesday- may be far worse than last month's Category 1 storm (the weakest on a scale of one to five), which still forced the shutdown of all three iron ore export terminals.
"Category 1 shut all three ports and contributed to a 9 percent drop in exports for January," said Jonathan Barratt, chief executive of Barratt's Bulletin, a commodity markets newsletter in Sydney.
"Shutting down for 3 days plus could affect upwards of 20 percent of supply for the month and see spot prices higher," he told CNBC on Friday.
Likely to bear the brunt of the cyclone's force are Port Hedland, which handles about a fifth of the world's seaborne-traded iron ore and is used by BHP Billiton, Fortescue Metals Group and Atlas Iron, and the ports of Dampier and Cape Lambert, about 200 kilometers (124 miles) south of Port Hedland, used by Australia's biggest iron ore miner Rio Tinto.
"I checked forecasts for Port Headland and an extensive period of wet will last for a few days and up to two weeks and will affect exports of iron ore," Barratt said.
The Pilbara region ships nearly half of the world's seaborne iron ore, mostly to China, Japan and South Korea. Australia's cyclone season runs from November to April and the region between Port Hedland and Dampier is known among mariners as "cyclone alley." At least half a dozen storms form there each season.
"This is the quarter where iron ore production typically gets impacted by weather-related events, so it's not unusual," said Gavin Wendt, senior resources analyst at Mine Life in Sydney. "There could be more bad weather on the way for Queensland coal as well, so we could be looking at a repetition of ongoing supply issues there too."
When contacted by CNBC on Friday, BHP Billiton said the miner was not able to say whether it was shutting operations as a precautionary measure. A spokesman for Rio Tinto told CNBC on Friday that the firm was "monitoring at this stage" the weather developments.
"We always take a conservative approach to managing our operations in extreme weather situations," BHP said in an email to CNBC. "We monitor all cyclone activity closely and shut in operations if we believe that is the safest course of action. We do not intend to give a daily update on the status of all our operations, but if there is any material impact on our production, we will report it in our quarterly production report."
The benchmark import price of 62 percent iron ore fines at China's Tianjin on Wednesday hit $158.90 a ton, the highest since mid-October 2011. The steel-making ingredient has been boosted by restocking by Chinese steelmakers - responsible for more than 60 percent of global consumption- and a draw down of inventory at the country's ports, the website Mining.com reported on Feb. 20.
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