The recent tailings dam disaster at the Corrego do Feijao iron ore mine in Brazil, Vale SA's second similar disaster in just over three years, resulted in the commodity's price increasing due to supply pressures.
Iron ore 62% CFR China surged to over US$90/t following the court-ordered suspension of Vale's Brucutu mine, which has an annual capacity of 30 million tonnes. The company plans to decommission all of its dams built using the upstream method, expected to result in the loss of about 40 Mt/y of product.
Corrego do Feijao and Brucutu are satellite mines related to the Paraopeba and Minas Centrais operations, respectively, in the southeastern state of Minas Gerais.
Analysts at Bernstein Research believe that market events such as Vale's production cuts could push prices above US$100/t.
"We think that there currently exists structural tightness in the market, which will turn into deficit in years to come," the analysts wrote in a Feb. 5 note.
Bernstein said it disagreed with bearish long-term forecasts for the metal, which are based on beliefs of spare capacity and weak demand in the system, and said the price surge after the disaster is proof that the contrary is true.
"If there were, in fact, significant spare capacity in the iron ore market, such a response ought to have been impossible. The price elasticity of iron ore seems incompatible with the notion of an oversupplied iron ore market," the team said.
In its weekly report on iron ore shipments, Bernstein said it expects Vale's shipments in the first quarter to fall to 76.3 Mt or lower, compared to an estimated 97.2 Mt shipped in the fourth quarter of 2018.
The overall estimate for iron ore shipments in the first quarter is 276.2 Mt, a 13.2% drop on a quarterly basis and a 6.5% decrease on an annual basis, according to the Feb. 7 note.
UBS said Feb. 5 that it expects a US$10/t difference in the iron ore price to impact Rio Tinto's free cash flow by 30%, or US$1.9 billion, BHP Group's by 16%, or US$1.6 billion, and Anglo American PLC's by 12%, or US$300 million.
Rio Tinto can increase iron ore production by about 4% to 350 Mt in 2019, while BHP can add about 3% to its 2019 output for a total of 283 Mt, according to the UBS analysts.
Despite the increase in iron ore prices, UBS downgraded Anglo American to "sell" from "neutral" while retaining a target price of 1,800 British pence on the stock.
"In our opinion, Anglo is the least attractive of the U.K. diversified miners," UBS wrote Feb. 8, citing lower shareholder returns than its peers, average volume growth and unfavorable expectations for its key commodities.
The UBS analysts instead prefer Rio Tinto, BHP and South32 Ltd. on valuation and more attractive returns.
Prices of iron ore and metallurgical coal are expected to moderate over the next 12 months as supply normalizes, according to the note, while palladium prices will fall in the long term and platinum prices will continue to stay depressed as diesel vehicles lose market share.
"Anglo's value is not compelling, its commodity basket is set to fall and stock specific catalysts are likely to disappoint," UBS wrote.