Iron ore in a technical bull market, following dam collapse, but how long will it last?

The iron ore price jumped after news of the latest Brazilian tailings dam disaster, at least initially. Investors took the immediate view with supply from one of Brazil’s larger mine set to be disrupted for some considerable time, there could be tightening in the market.

Immediately after the news, the spot price for benchmark 62% fines had jumped by 4.7% to nearly US$79 per tonne. That was the biggest daily percentage gain since December 2016, and was driven in part by memories of the effects on the market of the Samarco disaster of 2015.

This time round though, the effect is likely to be less severe. It’s true that the Corrego de Feijao mine accounts for 1.5% of Vale SA’s (BVMF:VALE3) annual iron ore output, but it’s also true that that output had been slated to drop in the coming years.

Unlike at the Samarco mine, this disaster happened at a mine that was on the way out.

“This complex is a shrinking part of Vale’s portfolio,” Nick Snowdon, an analyst at Deutsche Bank told clients in a note issued a couple of days after the disaster.

“It is probable that upward flex from their Northern System could limit any net output effect. Our base case therefore assumes a limited output impact and eventual iron ore correction lower.”

The lower grade 58% iron ore price actually fell on the day of the disaster, as buyers shifted their emphasis to higher grade ores of the kind that Feijao produced. As it stands, 62% fines and the higher grade premium ores remain in demand and prices are holding up.

The real key to pricing iron ore in the long term is unlikely to be supply, but rather demand from China.

But here too, the picture is complicated by recent events.

While the macro picture remains unchanged, and the economic context is broadly being set by continued, albeit slower, economic growth from China, some traders are worried that the Brazilian government may now institute checks on all the country’s tailings facilities, causing a real squeeze on supply.

It’s this fear that’s keeping the price higher, in spite of more sanguine analysis from the likes of Deutsche Bank.

“In the scenario that Vale’s mining licences are suspended, we could see prices remain supported for a prolonged period,” said Vivek Dhar, an analyst at the Commonwealth Bank.

Story by ProactiveInvestors