VALE ON (BOV:VALE3)
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By David Hodari and Amrith Ramkumar
Iron-ore prices jumped on Monday after the collapse of a dam owned by Brazilian miner Vale SA killed more than 60 people, fueling speculation of lower supply ahead.
Futures in the ferrous metal jumped 5% to $78.29 a ton, as hundreds remained missing after the bursting of the Vale dam on Friday, which released mining waste and flooded the rural southeast Brazilian town of Minas Gerais.
The incident caused analysts and investors to anticipate lower production of iron ore, the main ingredient in steel.
Shares of Vale, the world's largest producer of iron ore, tumbled 17% to $11.30 per American depositary share Monday. The company has suspended dividend payments and share buybacks, while freezing executive bonuses. It also created committees to help victims and investigate the incident.
The disaster came less than four years after the failure of a dam jointly owned by Vale and BHP Group Ltd., also in Minas Gerais, killed 19 people and left hundreds homeless in one of the country's worst environmental disasters.
While the dam that burst last week was relatively minor in terms of output, investors are pricing in the potential for stricter industry oversight going forward that would crimp supply, analysts said.
"The market's always going to react," said Vivienne Lloyd, senior analyst at Macquarie. "The probability of more stringent inspections and potential shutdown of other mines using similar methods has elevated since the disaster."
The mine that collapsed accounts for about 7% of Vale's output, said Ms. Lloyd. Similar "wet" iron-ore operations comprise around half of all Vale operations, according to Macquarie.
Increased scrutiny on Vale's operations could also affect investor confidence in the company's stock.
"Although Vale's modest levels of debt should protect the company's solvency, we expect the aftermath of this incident will weigh on the equity for the foreseeable future," RBC analysts said in a note.
Meanwhile, the incident may boost steel prices and support shares of Vale's competitors, other analysts say.
"While this is clearly a headline negative for steelmakers, they'll successfully pass on increased cost pressures to their customers in the coming weeks," said Seth Rosenfeld, equity analyst at Jefferies. The dam failure "gives them an easy excuse to push up prices."
The price gains in iron ore occur as analysts project slowing economic growth in China, the world's largest commodities consumer, to weigh on the demand and prices of commodities this year. For instance, copper futures have fallen nearly 20% from last year's high.
Still, some analysts predicted iron-ore demand could rise in the second quarter.
Steel buyers around the world have been living hand to mouth and are reluctant to sit on supply amid relatively low prices in recent months, Mr. Rosenfeld said. As a result, he said many could move to replenish thin inventories before prices extend their climb.
Write to David Hodari at David.Hodari@dowjones.com and Amrith Ramkumar at firstname.lastname@example.org
(END) Dow Jones Newswires
January 28, 2019 13:33 ET (18:33 GMT)
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