Investing Psychology


Coronavirus Eruption

Coronavirus Eruption

Divik N

An Interruption causing a Reduction in Production

The closure of a series of mines owned by the 11 billion reais (A$2.89 billion) Brazilian mining giant Vale, was enforced and ordered by a Brazilian local court after latest figures show a spike in COVID 19 cases. These 188 positive cases consist of workers within the Itabira mining complex and news of these cases have catalysed the suspension of the Conceição, Cauê and Periquito mines.

Supply & Demand

This restriction largely effects Vale’s production potential, with an expected decline in production by 10.29% (~8.1million tonnes per quarter of 2019)

Figure A – Vale Q4 2019 Report

This reduction equates to roughly 2% of international supply, which due to recent pandemic trade restrictions, magnifies to a much larger impact.

Albeit the huge drop in production, Vale has left their outlook unchanged with forecasts of 310million – 330million tonnes of iron ore expected for 2020 following comments made by Vale stating their production estimates have already accounted for coronavirus related predicaments.

The mining giant will no doubt struggle, to reach its previous size as coronavirus is only another problem they have faced since 2019. On the 25th of January 2019, a dam located in Brumadinho which carried Vale’s mining waste collapsed, burying workers and leaving the town and environment covered in piles of red mud. The death toll of this event totalled 240 people and on July 2019, Vale SA was convicted for the deaths, economic and environmental impact.

Vale’s history of catastrophic events now compounded by coronavirus cases, has pushed iron ore prices up by ~28.3% from ~US$80 at the start of May to US$102.43 per tonne at the end of last week.

The Recent Situation

As the world has seen, coronavirus is feared in its ability to rapidly spread and Brazil is left in a troubled situation to prevent the national as a whole from implementing tight restriction laws. With Brazil roughly contributing to approximately 23% of international iron ore supply, Australian mining rivals BHP(BHP), Fortescue(FMG) and Rio Tinto(RIO) have an open opportunity to capitalize on Brazil’s hindered production levels and further reap the profits obtained from the sharp spike in iron ore prices.

Earlier on 09/06/2020, the iron-mining industry within the mining sector has already realized these gains with investors pouring their money, causing Fortescue(FMG) to reach an all-time high of $14.87 after a 2.3% gain. Rio Tinto(RIO) also followed with a sharp jump in share price following the closure announcement of ~2.81%, closing the Tuesday at $101.37. BHP(BHP) also followed the pack with an incline of 2.93% in the early trading hours after the long-weekend, and ending the day at a well-placed $37.64 following a 3.18% gain.

[1] [Reuters]

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