Global iron trade faces disruption following port closure

Rio de Janeiro

THE global iron ore trade may be disrupted after Vale SA, the world's largest producer, was ordered by a Brazilian court to temporarily close one of its main ports following alleged environmental breaches. Futures for the raw material in Asia surged.

The court in Brazil's Espirito Santo state ordered a halt to export and import activities through Tubarao port after iron ore and coal dust were found in the sea.

Vale received the news from federal police "with surprise" and will use "all appropriate legal measures to ensure the re-establishment of its activities", the company said in a statement on Thursday.

Iron ore has plunged over the past three years as the world's largest producers including Vale and rivals BHP Billiton Ltd and Rio Tinto Group in Australia boosted low-cost supply just as growth in China cooled.

The Tubarao ruling adds to Vale's woes after a dam breach at its Samarco Mineracao SA joint venture last year caused the death of at least 17 people and led to widespread environmental damage.

The length of the closure would determine its consequences, according to Australia & New Zealand Banking Group Ltd (ANZ).

"That will be key to the impact," said Daniel Hynes, senior commodity strategist at ANZ. "I suspect if it's only for a few days, we won't see too much of a response in prices. Vale would be able to make up any lost tonnes if it lasts only a few days. However, any longer than that could start having an impact."

The SGX AsiaClear iron ore contract in Singapore rallied as much as 6.9 per cent to US$39.90 a tonne on Friday, while futures on the Dalian Commodity Exchange rose as much as 3.2 per cent.

Iron ore with 62 per cent content delivered to the Chinese port of Qingdao, a benchmark that's set daily, was at US$41.29 a dry tonne on Thursday, according to Metal Bulletin Ltd.

In the decision, federal Judge Marcus Vinicius Costa outlined fines for each day Vale fails to comply with the halting of port activities. Vale has continually invested in environmental controls at the port in recent years, the Rio de Janeiro-based miner said in a separate statement.

Steel-making giant ArcelorMittal also uses Tubarao, although the court's decision won't immediately affect its activities, it said in a statement.

Vale may be able to manage some of the short-term impact from disruption at Tubarao by tapping its distribution centre for Asia, which is sited in Malaysia and has extensive stockpiles, according to Philip Kirchlechner, director of Iron Ore Research Pty and former chief iron ore representative for Rio in Shanghai.

"This will enable them to fulfil their short-term contractual commitments," he said on Friday. "With hindsight this was actually quite a smart decision to set up this platform, originally set up for blending and transshipping but now it is actually becoming a useful buffer to absorb short-term supply disruptions." Bloomberg