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Vale, the world's biggest iron ore producer said prices for the steel ingredient will be hit as the coronavirus pandemic tips the global economy into recession.
In a briefing with analysts late on March 31, Vale chief financial officer, Luciano Siani Pires, said weak demand from steel mills outside China would offset supply disruptions in the rest of the world, potentially denting prices, which have been remarkably resilient this year.
Iron ore has averaged almost $90/t recently but in the past week has fallen 6% to a six-month low around $82/t and may continue to fall further, helping some of the world's biggest natural resources companies to emerge relatively unscathed from the economic chaos unleashed by the spread of the virus.
However, analysts are growing increasingly concerned about slumping demand in Europe and also China. Over the past week iron ore has fallen 6% to a six-month low of $82/t. Analysts at Citigroup project that prices will fall a further 17% to $70/t in the coming weeks.
Mr Siani said that iron ore prices had held up in the first quarter due to a combination of lower production from Australia and Brazil and falling supply from domestic mines in China, which is starting to normalize.
Price-supportive supply problems persist, because of lockdowns to prevent the spread of the virus in mining locations. But this is now being offset by lower demand in Europe, South Korea, Japan and the US.
In Europe, almost 15 million tonnes of steelmaking capacity has been idled, according to Vale. The US has cut 5 million tonnes of capacity, while Japan has cut 3.3 million tonnes.
Iron ore is the main source of income for Vale and rivals BHP Group, Fortescue Metals Group and Rio Tinto.
These companies, which can mine the steelmaking commodity for less than $15/t, have generated huge profits over the past year as the price has surged as high as $120/t following a string of supply disruptions and strong demand from China, the world's biggest consumer.
Vale's output fell a fifth last year to 302 million tonnes after the Brazilian miner was forced to close several mines following a deadly collapse that claimed the lives of more than 250 people.
Vale is targeting annual production of 340-355 million tonnes this year, up from 302 million tonnes last year, but achieving that goal will depend on obtaining regulatory permits to restart 30 million tonnes of shuttered capacity.
If Vale reaches its target and China does not launch a big stimulus package to boost economic growth, iron ore prices will most likely weaken from current levels.
"China's physical steel market glut will probably send steel lower and take iron ore with it," said analysts at Citi.
(Writing by Becky Du Editing by Harry Huo)
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