What happened
Shares of iron ore producers are having one of their best days in years after Brazilian iron ore giant Vale SA (VALE 1.54%) announced it would close 10 tailing dams and shutter operations at several mines after last week's dam collapse. Here's a quick recap of some of the stocks climbing on today's news as of 10:45 a.m. EST.
- Cleveland-Cliffs (CLF 0.81%): Up 15.7%
- Companhia Siderugica Nacional (CSN) (SID 1.85%): Up 11.9%
- Vale: Up 8%
- BHP Group (BHP 2.55%): Up 1.9%
So what
Iron ore is a commodity business, plain and simple. The price for that commodity is going to swing wildly based on the amount of supply available and demand for the stuff. Over the past several years, iron ore has suffered from oversupply. Several mining companies were betting heavily on China's voracious appetite for iron ore and built numerous new mines from 2005 to 2010. Once Chinese demand -- which is about half of global demand -- started to wane, the market found itself with too much supply.
Image source: Getty Images.
For years, many of the world's largest iron ore miners -- BHP, Rio Tinto (RIO 1.66%), Vale -- tried to fight for market share, but eventually all of them capitulated and started to shutter less profitable or lower-quality iron-ore-grade mines. Only recently have iron ore prices started to climb to the point that companies could generate a decent return.
Today, the supply side of the equation just got smaller as Vale announced it would be closing operations at several of its mines in Brazil following the recent tailings dam collapse. The dam collapse has left hundreds missing, and 84 people have been reported dead.
Vale's cutting 10% of supply is a big deal for the overall industry both because it is a major supplier and because its iron ore quality is among the highest of the major miners'. It currently produces about 65 million tons of pellets -- a slightly refined product with high iron ore content. Pellets and higher-quality iron ore have been in greater demand lately as Chinese steel mills have tried to curb pollution by using higher-quality feedstocks.
So the loss of Vale's higher-quality iron ore will have a large impact on pellets and higher-ore-content-grade material. For companies like Cleveland-Cliffs and Companhia Siderugica Nacional that produce higher-quality iron ore and pellets, it will likely mean even larger gains on prices than for lower-grade-ore producers like the Australian mining giants.
Now what
Vale's decision to cut production is going to send ripple effects across the entire iron ore industry. While the tide will likely lift all boats, those with higher-grade supplies, such as CSN and Cleveland-Cliffs, are likely going to benefit the most. That's likely why these two stocks are gaining even more than some of the larger Australian iron ore producers.
Based on the scope of this tragedy in Brazil, chances are it could mean even worse things for Vale. After all, this is the second catastrophic dam failure in the past five years. It's hard to say if the decommissioning of these tailing dams is the only action the company will need to take for safety reasons. Also, there are now lawsuits coming in from victims as well as U.S. shareholders about Vale's not disclosing the environmental risks these dams posed.
This event is likely going to have even larger effects on the iron ore market in 2019, but it isn't entirely clear what those will be. So investors should certainly be watching what happens in the coming months and should probably keep a close eye on 2019 forecasts from Cleveland-Cliffs and CSN.
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