Chinese tax cuts and a dam disaster in Brazil sustain iron ore spike

Firefighters receive supplies as they search for victims in the muddy aftermath of the Brumadinho dam disaster in Brazil.Credit:AP

More than a month after the dam collapsed, 122 people were still missing and 186 were dead.

Vale, the world’s largest iron ore producer, was forced to stop work at mines producing 75 million tonnes a year worth of supply in the aftermath of the collapse as Brazilian regulators demanded mines with similar tailings dams close for safety reasons.

Several lawsuits were launched against Vale and its chief executive Fabio Schvartsman stepped down, along with several other executives.

Philip Kirchlechner, director of Iron Ore Research, said Australian companies were well positioned to take up the slack caused by Vale’s output cut.

“Australia has much higher standards of safety, and much less reliance on tailings in iron ore because our iron ore… doesn’t require much processing,” he said.

“Australia, as a reliable supplier, is becoming much more important to China,” Mr Kirchlechner said.

But Mr Kirchlechner, who formerly ran Rio Tinto’s operations in Shanghai and chairs the investment committee of the Australia-China Business Council, said he expected the impact of Vale’s cuts would be swamped by changes to iron ore demand in China, the material’s largest consumer.

The Chinese People’s Congress, which meets annually to enact policy determined by the country’s Communist Party, announced the country would cut several taxes to boost consumption last week.

A women lights a candle at a memorial for the victims of the Brumadinho dam disaster.

A women lights a candle at a memorial for the victims of the Brumadinho dam disaster.Credit:AP

At the same time, Mr Kirchlechner said the congress’ key message was that China would pursue higher-quality growth in contrast to the breakneck growth of years past.

On balance, Mr Kirchlechner said those changes would push iron ore prices higher over the medium to long term.

“You’re not going to see a whole new world, but I think what you might see if a slightly higher brand where the price will eventually settle,” Mr Kirchlechner said. “Instead of being in a band between 60 and 70 [US dollars per tonne], we might be in a band between 70 and 80, so slightly elevated because of the combined effect of the supply side cuts but also the stimulus measures.”

But analysts at Macquarie Bank said they expected the country’s focus on consumer spending rather than construction would dampen the tax cuts’ impact.

“It follows that this latest stimulus event can really only be expected to support China’s current rate of commodity demand, nothing more,” they wrote.

Overall, Mr Kirchlechner said, the only certainty is that increased safety concerns and China’s changing economy would make the price of iron ore even more volatile.

Nick is a journalist for The Sydney Morning Herald.

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