Iron ore price, page-9312

It's all about the dam collapse in Brazil.
Vale is the world's biggest iron ore producer and this follows the dam collapse and deaths less than 4 years ago.

Vale produced over 105m tonnes (a record) in the Sep quarter of 2018, up 10.3% bs pcp.
And Vale sold 98.2 mt at a $8.60 premium over benchmark in the Sep quarter.

FMG produces around 170m tonnes per year (lower average grade ore). FMG was selling its term contracts for 56.7% Super Special Fines at a 40% discount in December vs 42% discount in November. FMG sold its 57.3% Kings Fines at a 12.5% discount in Dec vs 17% in Nov 2018. The 58.3% Fortescue Blend Fines was unchanged in Dec at a 29% discount.

The discounts are vs Platts 62% Iron ore.

The Samarco dam failure disaster in Nov 2015 was Brazil's biggest environmental disaster and there are still $billions in legal claims. Diresct deaths were 19, the river became a toxic mudflow, hundreds were displaced in a humanitarian crisis and entire fish populations were killed immediately as the slurry travelled 620km downriver to the sea.

That's why protestors are out already - how could such a disaster happen again so soon? The mine could be closed for months and it may affect more production from Vale (in my opinion) if this becomes Brazil's "gilets jaunes" moment.

If a decent chunk of Brazil's production is under a cloud we could easily see a move back up to the highs of the past 2 years of $90 for benchmark grade ore and the discount for Fortescue blend back down to 20-25% from current levels of nearly 30%.

That could add almost $US20 a tonne to FMG's realised price (or nearly $A4.8 bn pretax in a full year). That's $A1.08 per share in net profits - not something you'd want to put a lasting P/E on, but even without any multiple it shows there's more upside.

It is likely this won't last a full year, but it shows you the sort of upside that is likely to pressure analysts to upgrade their earnings forecasts and price targets.

The analysts have egg on their face at present and you often get the best price reaction when a shock occurs in the opposite direction to that which the analysts have been expecting.

Tightening steel margins have already caused Chinese steel mills to increase use of low grade fines as the benchmark price has risen $10 from the November low. Inventories for low grade fines have been declining rapidly on strong demand in China according to quotes from Chinese mills. Lower freight prices are also seen supporting demand for FMG low grade fines as they are sold on an FOB basis. Capesize freight rates from WA to northern China have fallen over $2/wmt in a month.

These factors have already tightened up the discount for lower grade ore somewhat before this disaster. That is very positive for FMG - it is the stock with the leverage to the current events.

We are just at the start of this disaster, no one knows the reaction of the Brazilian people or their government (although there could be outrage after Samarco). No one knows how much of Brazil's production could be affected by this, or for how long, and I don't profess to know either - I would simply say it is very very serious and there could be price implications for FMG well above what's already happened - the numbers I included above aren't estimates, they are just to show the leverage.