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Iron Ore’s Rally Is Living on Borrowed Time

Iron Ore’s Rally Is Living on Borrowed Time

News is brought to you by Mr. Shailesh Karia

Published on 7th February, 2019

Commodities love a tragedy.

Last week’s burst of a tailings dam at a Vale SA iron ore mine in Brazil’s Minas Gerais state has left close to a hundred, and possibly approaching 400, people dead. Far from wilting at the news, iron ore has been surging – up 12 percent in the last five days, its biggest five-day jump in about 18 months.

That seeming cold-heartedness is only natural. Vale produces about a quarter of the iron ore traded by sea. With the company announcing this week that it would close 10 similar dams, a considerable slice of the market – some 40 million metric tons – will be temporarily going off-line just as China’s post-Lunar New Year construction cycle kicks up a gear.

Still, those inclined to make a bullish bet on disaster may be in for a dose of karma. This rally is more likely to collapse than extend.

For one thing, there’s the fact that 40 million tons isn’t all that much in the context of a seaborne iron-ore market that ships about 1.4 billion tons a year.

While Vale’s iron ore is uniquely prized thanks to its high iron content, the shuttered operations are also at its lower-quality pits. Product from the Vargem Grande and Paraopeba complexes has to be processed to turn it into salable pellets or blended with higher-grade ore from the Amazon before being shipped.

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