Vale SA (VALE3), the world’s largest iron- ore producer, declared force majeure on iron-ore shipments and said it will lose 2 million metric tons of the steelmaking ingredient because of heavy rains in three Brazilian states.
The force majeure, a legal clause that allows companies to miss deliveries, affects a series of iron-ore contracts beginning yesterday, according to a regulatory filing by the Rio de Janeiro-based company. The loss is equivalent to 0.6 percent of Vale’s output target of last year, or 1.5 percent of its annual sales to China, which stands at 130 million tons.
Floods and landslides in the southeastern states of Minas Gerais, Rio de Janeiro and Espirito Santo caused by rains have killed at least 30 people and left more than 5,000 homeless since the beginning of the year. The force majeure may have a “psychological effect” on Chinese buyers, said Tang Xiaolan, a Shanghai-based analyst with researcher Mysteel.com.
“It would just eliminate about 10 normal-sized ships of supply from the market,” Tang said. “Iron ore supply is sufficient at present. Steelmakers are reluctant to buy at the current prices. It’s mainly stocking activities from traders.”
Iron ore with 62 percent content at China’s Tianjin port gained 22 percent to $142.2 a ton yesterday from its low in October, according to the Steel Index.
The rains “have created serious challenges to the operations of our Southeastern and Southern systems,” Vale (VALE5) said in the filing. “We are communicating with customers as required under our agreements with them.”
The force majeure may pare Vale’s first-quarter earnings, BTG Pactual SA said today in an e-mailed note to clients.
A loss of 0.6 percent “Doesn’t sound like much, but 2 million tons from a 25 million-ton monthly production suddenly makes noise,” BTG said in the note. “We do therefore expect a Q1 impact, adding to already low volumes and weak production.”
Storms in southeastern Brazil led Vale’s production to drop by about 600,000 tons in the first quarter of 2011.
MMX Mineracao e Metalicos SA, the mining producer controlled by Brazilian billionaire Eike Batista, said on Jan. 9 that iron-ore production has been affected by heavy rains in Minas Gerais.
Vale rose 0.8 percent to close at 39.81 reais in Sao Paulo trading yesterday, compared with a 0.3 percent gain for the benchmark Bovespa index.
Berge Everest, one of the world’s largest iron-ore ships operated for Vale, has reached China’s Dalian port fully loaded for the first time, T.S. Ang, a technical executive at BW Fleet Management in Singapore, said Dec. 28.
Iron ore from the vessel is still held at the bonded areas of the port and hasn’t been sold to buyers, either in China or other Asian clients, Xu Guangjian, analyst from researcher Umetal.com, said today.
“Vale may have to sell it slowly,” he said.