Dam failure near a major Brazilian iron mine may have a knock-on effect for the capesize market according to one equity analyst. The dam in the Brazilian state of Minas Gerais broke Thursday afternoon, inundating a nearby town and causing at least two known fatalities. Samarco, a joint venture (JV) of Australia’s BHP Billiton and Brazil’s Vale, owned the dam, which stored wastewater from its nearby operations.
A JP Morgan report says Samarco production of 29 million tonnes of iron ore accounts for 2.5% of global supply. The mine remains closed pending an investigation into the incident. In spite of its relatively small share of global iron supply, though, the shut-in of the mine could cause some weakness in the market for capesize vessels, the report added.
“Because of the distance between Brazil and China (relative to Australia), Brazilian iron ore exports have an outsized effect on dry bulk tonne-mile demand,” JP Morgan analyst Noah Parquette wrote.
A worst case scenario for capesize demand assumes all the mine’s production going to Asia. However, in the most recent export figures, only about 44% of the mine’s production went to China. Moreover, the production lost could be made up by increased exports from Australia.
“While it’s possible this could have a material effect on the capesize segment while the JV is offline, the loss in ton-mile demand could be partially offset by increased Australian exports to the Atlantic basin,” the report concluded.