Torlizzi Base Metals Report: Misfortune boosts iron prices

The steel industry and the iron ore (and scrap) industry that supplies it appear to be attracting positive sentiment from commodity investors.

The spot price of iron hit $85 per ton in late January, as producer Vale announced it would decommission all of its upstream dams—similar to one that burst in Brazil earlier in January—potentially affecting 40 million metric tons of iron ore production and 11 million metric tons of pellet production.

Goldman Sachs sees it as one more reason to raise its estimate on iron ore, writing, “The seaborne market was already tight with benchmark 62 percent iron ore trading at $75 per ton before the dam burst,” writes one of the firms’ analysts.

The analyst continues, “On net, we estimate a production loss of 10 to 15 million tons from Vale in 2019. The impact of the 11 million ton loss in pellet production could be more dramatic since it represents about 10 percent of the seaborne pellet market. We have raised three-, six- and 12-month targets for iron ore to $80, $70 and $65 per ton based on Brazil supply reduction.”

London-based Capital Economics sees higher iron ore pricing potentially reaching $100 per ton, writing, “The company states that the loss will be partially offset by production increases elsewhere in Brazil. This may prove difficult as ramping up output in the current environment may meet political resistance.”

On the nonferrous side, the value of nickel on the London Metal Exchange (LME) reached $12,455 per metric ton in late January, rallying by a double-digit percentage since the start of 2019. LME nickel on-warrant inventories have dipped to 142,000 metric tons, close to lows not seen since early 2014.

Copper prices are also rising on the LME in 2019, and its on-warrant inventory fell by 11,000 metric tons on Jan. 30 alone. A fall of some 22,600 metric tons in a two-day span brings the inventory total down to 104,950 metric tons.

Zinc pricing has been relatively flat, though there was evidence of producer selling at a price of $2,700 per ton in late January. Its LME inventory is down to 57,600 metric tons, a low not seen since 2007.

Aluminum pricing is up slightly in 2019, with producer selling seen in the $1,915 to $1,920 per metric ton range. The restart of Hydro’s Alunorte facility in Brazil, after a government restriction was lifted in mid-January, is providing one ceiling on pricing.

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The author is managing director of Milan, Italy-based T-Commodity and can be reached at gianclaudio@t-commodity.com. T-Commodity is a consultancy specializing in market intelligence, risk management and educational services on commodities and foreign exchange markets.