As ramifications from the Brumadinho dam disaster continue to shake up global markets, the price of iron ore is being tipped to perform stronger for longer – and Australia’s big players are set to cash in.

January 25, 2019 was one of the mining industry’s darkest days.

When an upstream tailings dam collapsed at Vale’s Corrego do Feijao iron ore mine, the Brazilian town of Brumadinho was engulfed in a sea of sludge that left more than 230 people dead and many more missing.

It bore haunting similarities to an incident less than four years earlier, when another deadly dam burst – this time at the BHP-Vale-run Samarco joint venture – claimed 19 lives.

This year’s accident has had far greater reaching consequences for Vale than the 2015 disaster, with a number of its mines and processing plants having to suspend operations – either voluntarily or by order of the courts.

Vale’s 30-million-tonne-a-year Brucutu mine remained closed at time of writing following a series of rulings in the Brazilian courts where activities were suspended, reinstated and suspended again.

In response, Vale announced it would spend US$1.85 billion ($2.69 billion) to decommission all of its upstream tailings dams over the next three years.

This process is expected to significantly affect the miner’s annual production values in the future. The impact of the dam rapture is also causing more immediate problems.

Vale’s iron ore production for the first quarter of 2019 was 28 per cent and 11 per cent lower than the December and March 2018 quarters respectively. Iron ore sales were also seriously dented, down 31.2 per cent on a quarter-by- quarter basis.

Australian miners enjoy the perfect storm

While Vale scrambles to pick up the pieces, Australia’s iron ore giants – Rio Tinto, Fortescue Metals Group and BHP – are thriving.

The price for iron ore is the highest it has been in half a decade as Chinese crude steel production remains strong.

According to China’s National Bureau of Statistics, steel manufacturing reached 231 million tonnes in the first quarter of 2019 – an increase of 9.9 per cent year on year.

“It has been the perfect storm,” The West Australian Mining Reporter Stuart McKinnon said.

“This disaster has pulled about 90 million tonnes out of the global seaborne trade for iron ore. What that means is there is less supply and, consequently, prices will go up because there is more competition for the supply.

“The other thing that wasn’t calculated in was how strong Chinese steel production is. People were predicting it to go a bit off the boil, but in fact it’s at record levels.

“We’ve seen the benchmark prices break through $100 a tonne – which is the first time it has done so for five years. There are huge margins on the ore in the current market.”

According to FMG’s March 2019 Quarterly Production Report, the company sold its iron ore at the average price of US$71 per tonne throughout the March quarter, compared to US$48/tonne during the December quarter – an increase of 47 per cent.

This more than compensated for the impact of Tropical Cyclone Veronica, where FMG lost 2.5 million tonnes of shipments during the five-day closure of the Port Hedland Port in March.

FMG announced in May it would hand shareholders a $0.60 per share dividend on June 14 – which, according to Mr McKinnon, was unexpected.

“The bigger players who have that bulk ability to ship at a higher rate than anyone else are really creaming it,” he said.

“They’re giving it back to shareholders in the form of special dividends and share buybacks. It looks like, at the next result season in August, the miners are going to have another pile of cash to give back to shareholders, so this is all great news from a shareholder perspective.”

Ernst and Young Global Mining and Metals Leader Paul Mitchell said this greater cash flow increased the likelihood the big players would allocate capital for new projects.

“Hopefully it accelerates the development of Rio’s Winu discovery in East Pilbara,” he said. “To get a copper project in Western Australia would be fantastic.

“It also means they’re going to spend a bit more on innovation and education, which can sometimes be discretionary when times are tough.”

While it all seems good news for the iron ore miners, Mr Mitchell said one watch point would be whether the current prices would have inflationary pressure on costs.

Although, he added companies were more focused on cost management than ever before and had learnt from mistakes of the last mining boom.

“From everything I’m observing, the majors are being extremely responsible about cost management at the moment,” he said.

“During the super cycle it didn’t really matter what it cost to get it out of the ground, but we are now seeing a good focus on productivity and product management.”

While it remains uncertain when Vale’s suspended operations will come back online, Mr Mitchell said we would see higher iron ore prices maintained for a significant period.

“I don’t think those mines are going to come on quickly, but they will come back, it’s just a question of when, but we will know well in advance,” he said.

“Staying above $80 a tonne for the rest of the year is looking pretty good at the moment.”

With the underlying fundamentals for iron ore very strong, Mr McKinnon said there were a lot of bullish signals.

“We could see the iron ore price up around the $100-a-tonne mark and beyond for quite a few months,” he said.

“Things can change pretty quickly, so we will have to wait and see how it pans out, but it looks like it is going to be a case of stronger for longer.”

Image: Large miners with the ability to ship large volumes of iron ore are making the most of buoyant prices. Image: Rio Tinto.