Industry Trend Analysis - Low-Cost Producers To Overcome Weak Prices - FEB 2016

BMI View : Brazil ' s iron ore output will experience solid growth, supported by low production costs and a strong project pipeline over the coming years. The country ' s key producer, Vale , will drive production growth , despite legal and financial headwinds following the November 2015 dam burst.

Brazil's iron ore production growth will be supported by low operating costs and a strong project pipeline over the next few years. We forecast the country's iron ore output to climb from 359 million tonnes (mnt) in 2016 to 460mnt by 2020, averaging 6.3% annual growth during 2016-2020. The country's dominant producer Vale's low production costs and new projects coming online will outweigh production losses due to government penalties and increased oversight stemming from the November 2015 mine tailings dam burst ( see: ' Dam Breach To Hurt BHP & Vale ' , November 19 , 2015). For instance, Vale's scheduled iron ore shipments increased by 18.2% y-o-y over the first 22 days of January 2016, indicating an easy recovery ahead from temporarily suspended port operations. On January 25 2016, a Brazilian judge overturned the temporary closure of Tubarao, Vale's largest iron ore port, allowing the firm 60 days to fix environmental issues.

We believe Vale's massive stockpiles in Asia and the firm's capability to redirect iron ore shipments to other ports in Brazil, including Ponta da Madeira, Itaguai and Guaiba, will offset any short-term disruptions. In addition, the company's low-cost production will ensure the firm remains competitive in the current weak iron ore price climate. In Q315, Vale reported historically low iron ore cash costs of USD12.7/tonne, breakeven production costs at approximately USD40.0/tonne and 75% physical progress at the S11D mine (production capacity of 90.0mnt per annum) complete.

Quick Recovery Supports Growth Outlook
Vale - Brazil Iron Ore Scheduled Shipments (deadweight, mnt)
Source: Bloomberg

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