[SMM analysis] feedback from steel mills after Vale dam break

As of 29 local time in Brazil, Vale dam break accident has killed 84 people were killed, at least 276 people are missing. -Brazil 25 local time, its southeast Minas Gerais, an iron ore waste mine dam burst on the same day, killing four people were injured and nearly 200 missing. VALE shares fell sharply as a result of the accident, with Vale of Brazil closing down 8.34% at $13.62, its lowest level since Jan. 3. Night swaps rose $3.50, or about 4%, to $78.

On the 29th, Vale CEOFabio Schvartsman said: the company has decided to do whatever it takes to put an end to the safety risks of the dam. The company will unswervingly shut down 10 dams such as the Brumadinho dam over the next three years. The overhaul, which is expected to cost nearly $1.1 billion, will affect 40 million tons of iron ore a year, including 11 million pellets of fine powder. Driven by this news, 29 Liantie contract rose rapidly after the opening of the limit, the import port spot prices as of Friday is up 40 to 60 yuan / ton compared with the previous month.

As events continue to ferment, there are various interpretations of Brazilian mine supply in the short term; data tracked by SMM show that the iron ore produced 7.8 million tons in 2017, accounting for about 30 per cent of the (paraopeba) complex in Palaupeba, where it is located. According to relevant data, the output of the Palaupeba (paraopeba) comprehensive mining area in 2017 is about 26.3 million tons, accounting for about 7 per cent of the total annual output of Vale2017. As of September 2018, Vale's iron ore production in the complex area totaled about 20.6 million tons, an increase of 670000 tons from 19.93 million tons in the first three quarters of 2017 compared with the same period last year.

In absolute terms, the impact is limited. As Vale Guoxuan will close 10 dams in the future, affecting production of about 40 million tons, the current market is exploding again. Considering that the mining area mainly produces high silicon bar diameter, it is mostly used to mix with the northern system card powder to form high-grade, low-silicon and low-aluminum BRBF. It is rumored that production above BRBF60% is sent to China, so SMM conducted a survey of individual steel companies on the accident.

A steel enterprise in North China believes that there are many speculative factors in the current ore prices, and temporarily choose to wait and see the market trend after the festival; some use Brazilian mines, and think that the market prices after the festival will gradually be attributed to rationality. If the premium of subsequent Vale products is too high, the proportion of medium and high grade Australian ore will be considered.

In addition, a steel enterprise in North China, due to a large increase in BRBF this week, directly abandoned this week's procurement, and came back to wait and see after the pre-holiday season; previously, due to the high premium of BRBF, the steel mill had increased the use of Jinbuba and other varieties.

A steel company in central China said it was more concerned about the progress of the incident because it had part of its agreement with Vale. At present, no notification has been received from the mine of any delay in shipment or shortage of supply. It is also believed that the short-term outbreak of the event has a sharp rise in the futures market, but believes that the impact of the event on prices will not soar to this point. Attention is also being paid to whether other steel mills plan to adjust the mix and what varieties to replace them.

In addition, individual steel mills have increased their purchases of domestic mines and other varieties at relatively low prices since prices came up this week.

According to the SMM data model, according to the calculation of the current 85 US gold mine, the current net profit of thread and hot coil in steel mills will maintain about 500yuan per ton (excluding three fees and other expenses), and the acceptance of prices by steel mills will decline. Demand for low-and medium-taste mines will rise.

To sum up, SMM believes that back after the festival, import prices in the supply contraction expectations on the premise of enhanced prices or continue to strong volatility trend. However, if the Brazilian mine premium continues to rise, steel mills due to cost considerations or adjust the proportion of other varieties, the overall import mine market prices will be suppressed.