The collapse of the upstream dam in Brumadinho will hurt Vale’s iron ore production from Minas Gerais in Brazil if the Brazilian government does not allow Vale to compensate the loss by increasing production at its other mines. Potentially 35-40 Capesize vessels might lose employment in 2019.
Another disaster in a little over three years has brought Brazil’s iron ore mining sector under the lens with severe crisis and criticism. An upstream dam collapsed on 25 January 2019 at the Feijao mine in Brumadinho, the Brazilian municipality located in Minas Gerais.
The burst dam was using ‘upstream upheaval’, an old and less expensive technology compared with newer systems such as ‘dry containment’. The technology used at Brumadinho is being used at 19 other Vale mines, so the ramifications of the collapse are significant.
In November 2015, at Mariana, there was another disaster when a dam using the same old technology collapsed. After much criticism, Vale decided to decommission nine of its upstream dams and the process is still underway. But following the current disaster, Vale has decided to decommission all of the remaining 10 upstream dams as well. As of today, 40 million tonnes of iron ore production associated with the dams will be decommissioned.
While Vale wants to increase production at its other mines to compensate for the loss of the 40 million tonnes, a furious Brazilian government is unlikely to permit the company to increase operations in the near term. Allowing Vale to do so will only add to public resentment against both the company as well as the Brazilian government.
In the meantime, most of the iron ore produced at the affected mines is sold on a spot basis and exported to Asia. Replacing the 40 million tonnes will be difficult for any exporter (India, South Africa and Canada) other than Australia. India for example will find it difficult to increase iron ore exports as its domestic demand has been on the rise and the country is fast becoming a major iron ore importer.
Elsewhere, South African mines are struggling with rail/road logistic issues to transport iron ore to ports. The country’s iron ore exports declined in 2018, similar to those of India. Likewise, Canada’s exports of iron ore to Asia have been low, and have grown by less than two million tonnes annually over the past five years.
As these three major exporters of iron ore are unlikely to be able to compensate for Vale’s loss of production, Australia will most probably gain from Vale’s loss of exports. However, due to voyage distances a sharp decline in Capesize tonne miles is on the cards.
In numerical terms, Australia’s port Hedland is 3,524 nautical miles away from Qingdao while the Brazilian port Itaqui, which ships most of the iron ore from Feijao, is 11,979 nautical miles from Qingdao. In a year, one Capesize vessel ships two million tonnes of iron ore from Hedland to Qingdao, while the same vessel ships just 0.7 million tonnes in a year from Itaqui to Qingdao. Therefore, at 12 knots, it takes 30 days for a Capesize vessel to complete a round voyage between Hedland and Qingdao while it takes 85 days for it to complete a round voyage between Itaqui and Qingdao.
The loss of 40 million tonnes of iron ore on the Brazil-China route will thus leave an equivalent of 55-60 Capesizes unemployed, but will provide employment for some 20 Capesizes on the Australia-China route. As a result, the latest disaster at a Brazilian mine is likely to reduce Capesize demand by some 35-40 vessels in 2019.