Brazil’s Crisis Stokes Iron Ore's Glow

(Bloomberg Opinion) -- Brazil has just overtaken Russia to claim second spot in the global tally of coronavirus cases, behind only the U.S. The epidemic is threatening to disrupt supply in the world’s second-largest exporter of iron ore as China’s steel demand recovers, driving prices above $100 a metric ton for the first time since August. The scale of the unfolding health cataclysm suggests they won’t reverse soon, even if the rally looks unsustainable.

Last year was unusually dramatic for iron ore. A fatal dam collapse took out almost a quarter of Brazilian miner Vale SA’s original 2019 target of 400 million tons. Weeks later, a tropical cyclone in Australia dented global output further. The supply impact then was immediate and clear, and prices responded accordingly. This year’s surge has been almost as much about fear of disruption as about current supply, as an outbreak at Vale’s Itabira complex showed last week. Vale said it obtained an injunction to continue work at the operation after prosecutors sought to temporarily shut down activities for coronavirus testing.

Demand is helping to raise the temperature. Iron ore is highly dependent on China — which accounts for over two-thirds of global imports — and has benefited from the restart there more markedly than base metals. Chinese industrial output recovered strongly in April, port stockpiles have been coming down, steel inventories have declined and mill margins look healthy enough. Steel industry purchasing managers’ index numbers for May confirm the trend. That helped push physical spot ore to $101.05 a ton Friday, while futures in Singapore are trading just shy of $100.

China’s appetite will ease, though, and possibly before the rest of the world picks up. As Commonwealth Bank of Australia analyst Vivek Dhar points out, China significantly increased the annual local government special bond quota this year, usually used to fund infrastructure — but only 40% is now available for the remaining seven months of 2020. And while the National People’s Congress last month talked up infrastructure plans, it was the measured approach most had expected, not a repeat of the binge spending of 2008. So there’s reason for analysts, including Bloomberg Intelligence, to point to cooler prices in the year ahead.

In any case, demand hasn’t been the real driver here, supply has. For now, the market has no answer to the key questions of when Vale can get back to pre-disaster production targets, and what the epidemic means for Brazil. On Sunday, President Jair Bolsonaro joined supporters protesting against Congress and the Supreme Court in Brasilia, stoking concerns of a constitutional crisis to compound the health disaster.

In the short term, it’s hard to be optimistic. Bolsonaro has repeatedly dismissed the seriousness of the illness and appeared maskless over the weekend, despite local regulations. Brazil already has the fourth-highest death toll globally, with more than 29,000 fatalities — five times where it was a month ago. More worrying for the iron-ore market is how fast the illness is spreading outside big cities, a problem even if mining operations are considered essential, and exempt from lockdowns for now. That could change. Both the rate of infection per person and fatalities per inhabitant have been highest in the impoverished north, which is home to Vale’s giant Carajas operation. The nearby 200,000-strong town of Parauapebas alone, where Vale has contributed testing, tracing and medical help, has more than 2,500 cases as of Sunday .It is noticeable that both Australia’s iron-ore majors, constrained by bottlenecks, and China have given signs of expecting more disruption in the future. China is preparing to allow state-owned companies to develop the giant Simandou deposit in Guinea. Down Under, miners are considering alternatives, too. BHP Group has indicated it is looking at options to increase export capacity at Port Hedland, in Western Australia.These initiatives will take time to have an impact. Increased supply and lower prices are coming eventually — just not soon. Iron-ore bears take note.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.

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