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Iron ore surges as Vale's mine shutdown fans supply concerns

[NEW YORK] Iron ore futures jumped after top iron ore miner Vale SA was ordered to shut operations at a complex that accounts for about a 10th of its output, adding to supply woes and boosting concerns that surging Covid-19 cases in Brazil will disrupt other mines.

Prices surged to US$103 a ton in Singapore on Monday, the highest since August 2019, after a Brazilian labor court issued the order to halt mining at the Itabira complex after 188 workers tested positive, restoring a ban sought by prosecutors that Vale had fended off last month.

The halt is in place until a final court ruling or until Vale satisfies labor inspectors on its control measures, with a daily fine set at 500,000 reais (S$140,000).

In a statement Saturday, Vale said that while the shutdown order may create shortages in the Brazilian market, the Rio de Janeiro-based company is sticking with its annual output guidance. Until Friday's closure ruling, Vale had managed to operate through the pandemic, adopting safety measures without stalling output.

"In isolation, this disruption does not change our outlook for a global iron ore surplus," Tyler Broda, an analyst at RBC Capital Markets, wrote in a note to clients. "It does however serve to reinforce structural supply-side concerns about Brazilian production."

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The shutdown comes as Covid-19 explodes in Latin America, with the region's highly urbanized population of 600 million becoming the new global epicenter. Brazil is now second only to the US in number of cases.

In April, Vale cut its production guidance to between 310 million tons and 330 million tons. That revised projection considers as much as 15 million tons of losses from eventual Covid-19 impacts.

Considering the expected monthly production of 2.7 million tons from Itabira, "there is no need, at this moment, to revise the guidance," it said.

The company said the Itabira shutdowns may cause shortages of pellets for blast furnaces used in the domestic market given the mines supply the Tubarao pelletizing complex.

Vale said it has adopted measures to suspend activities at Itabira and, regardless of any new initiatives, it has already taken preventative and containment actions in line with World Health Organization protocols, such as reducing its workforce, mass testing and screening and social distancing.

Before the Itabira order, the iron ore market was widely expected to flip from a deficit to a surplus in the second-half, with lower prices seen on a recovery in Brazil exports. Vale has made preparations to resume operations at its Southern and Southeastern systems, according to a China Metallurgical News interview with executive director for ferrous minerals Marcello Spinelli. The miner's fatal dam disaster site last year, which crimped shipments, is part of the Southeastern systems.

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