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Material Matters: Iron Ore, Nickel And Crude Oil

Commodities | Feb 13 2019

Following the Vale dam collapse in Brazil, analysts have upgraded their short-term iron ore price forecasts as supply drops. Pressure remains on other base metal prices, including nickel, with Vale a major producer.

-Iron ore prices jumped in January following the Vale mine disaster in Brumadinho, Brazil, and supply will likely drop this year
-Uncertainty over Venezuelan sanctions hangs over the crude oil market
-The nickel price has gained on supply concerns
-Gold is up this year on prospects of a pause in US interest rate rises

By Nicki Bourlioufas

While commodity markets have been weighed down by the outlook for slowing global growth, iron ore spot prices jumped after the Vale mine disaster in January.

In addition, over the past three months, zinc stockpiles in exchange warehouses have dropped -40%, while lead and nickel are down -10%. Copper and aluminium are relatively unchanged, but they are down significantly on a six-month basis. This is likely to keep upward pressure on prices, according to ANZ Bank.

In more recent days, base metal prices have been supported by optimism that the US-China trade tensions will be resolved before the current truce ends in March, though aluminium fell as the US lifted sanctions and China's Hongqiao said it would resume some output at its halted smelters, reports Morgan Stanley.

But eyes have been focused on iron ore supply concerns.

Iron Ore

The iron ore price has rallied on the Vale mine disaster. Iron ore recently rose to over US$90/t as Vale declared force majeure following a court order to halt its Brucutu mine operation.

Brucutu has an annual capacity of 30m tonnes (mt) of iron ore and has been in operations for 13 years and is Brazil’s second largest mine. Estimated production losses are near 30mt, which is on top of planned production cut of 40mt announced by the company, according to a research note from CBA Global Markets Research.

CBA forecasts the iron ore price could spike above US$100/t as supply drops, but this could be temporary if Vale successfully challenges the court order halting production at Brucutu. CBA has upgraded its iron ore price forecast by circa 19% to US$82/t in 2019. “We see upside risk to our price outlook given the downside risks and uncertainty facing Vale’s production outlook.”

According to Credit Suisse, Vale's mine suspensions and production cuts will reduce iron ore supply by -52mt on a base case estimate, reducing the 2019 surplus to just 16mt, down from its previous forecast of 68mt.

“In the near term, China port stocks remain depleted; iron ore restocking ahead of construction season will begin after Chinese New Year (CNY); and Vale's force majeure should divert buying to spot cargoes. The iron ore price should soar after CNY,” predicts Credit Suisse.

However, CBA expects Vale will react quickly to limit supply disruptions and by the first quarter of 2020, Vale will be able to bring back nearly all of its lost production from other operations. So CBA doesn’t see a prolonged iron ore price spike above US$90.

Morgan Stanley is more conservative and expects the iron ore price to fall as China winds back steel production in the second half of 2019. “All else equal, without Vale’s expansion, the market will become tighter, but won’t move into deficit.  We therefore expect the price to correct from its current level in the US$80/t and maintain our view of a downward trend in price through 2019,” thus reads the forecast from Morgan Stanley.


Following the Vale dam collapse, expected nickel production losses from Brazil boosted market sentiment.

Over the 2019 year to February 4, Nickel prices were up 17% to US$12,407 (LME cash). However, prices gained were capped after Vale said that none of its nickel mining operations utilise the upstream method dams which have caused problems in its iron ore operations.

Crude Oil

The uncertainty over the political turmoil in Venezuela continues to hang over the crude oil market. The political turmoil now engulfing the South American nation is likely to see both crude oil production and exports come under pressure. Prices jumped in January.

According to ANZ bank, tighter US sanctions could cripple Venezuela’s oil industry. The US has announced it will tighten sanctions on Venezuela, stopping the flow of crude oil between the two countries.

Nicolas Maduro was sworn in for a new six-year term in early January following last year’s controversial presidential elections. Following the new sanctions, ANZ expects Venezuelan exports to quickly fall by -300kb/d to around 700kb/d.

So far, the rise in the oil price has been marginal. “We suspect the market is assuming the disruption will be relatively short lived. More importantly, there appears to be a view that a new government under Juan Guaido would reinvigorate investment and thus supply,” says ANZ.

According to Citi, Venezuelan exports continue to fall following US restrictions. The US Treasury has indicated it will bar anyone from the US financial system that does business with the state-owned oil company PDVSA.  However, while Venezuelan oil is in dislocation mode, “it’s premature to call it a disruption,” Citi says.

The four main US importers of heavy Venezuelan oil—Chevron, Citgo, Valero and PBF—are scurrying for alternative supplies, bidding up heavy sour crudes, tightening light-heavy, sweet-sour spreads even more than had resulted from the OPEC/Non-OPEC cuts, writes Citi.

With the recent new round of OPEC/Non-OPEC cuts of -1.2-m b/d decided in December 2018, coupled with the tightening sanctions on Iran and Venezuela, the spreads have again narrowed. Heavy sour strength is bolstered through the first half of 2019 by continued complex refinery capacity growth and tight fuel oil markets, says Citi.

Tanker tracking indicates that total exports slipped by -11% m/m in January, but are sharply down -16% to the US following the announcement of sanctions. The US Treasury has indicated it intends to block the government from accessing circa $7bn in assets in the US, which could cost the regime as much as $11bn in oil sales annually.


Recent dovish statements by the US Fed's chairman have resulted in a weaker US dollar and gains across the precious metals complex. Over the 2019 year to February 4, the gold spot price was up 2.8% to US$1,318, buoyed by the prospects of a halt in US rate rises.

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