The outlook for our iron ore miners has improved with Brazilian rival Vale S.A. tipped to take three years to restore output of the steel making ingredient from its mines.
That's longer than what some were expecting and the update from Vale is likely to keep the iron ore price higher for longer.
The Rio Tinto Limited (ASX: RIO) share price reacted positively by bouncing from its morning loss to trade 0.3% higher at $95.56 during lunch time trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index fell 0.4% into the red.
Rio Tinto is arguably the best placed to benefit from Vale's misfortunes and that's probably why the BHP Group Ltd (ASX: BHP) share price is flat at $36.80 (although it did come back from morning losses as well) and the Fortescue Metals Group Limited (ASX: FMG) share price is 0.4% weaker at $7.51.
Rio Tinto has more to gain
Rio Tino generates more of its earnings from iron ore than BHP and has signalled it would consider investing more to expand output when BHP appears happy to hoard cash instead of increasing capex.
Rio Tinto's ore is also similar quality to Vale while Fortescue's ore is of lower quality and has to be sold at a discount to Chinese mills.
Coming back to Vale, the miner's annual output was cut by around 23% after the tragic tailings dam collapse in January this year at its Brumadinho dam. This equates to 5.6% of global iron ore supply, according to the Australian Financial Review.
Iron ore disruption
That may not sound like much of supply drop, but it makes a significant difference to the iron ore market and is the key reason why the price of the commodity has jumped over US$95 per tonne (it's gained 43% since over the year).
Around 90 million tonnes of the 400 million tonnes of ore output from Vale has been shuttered since the disaster that claimed 231 lives. The AFR reported that its chief financial officer Luciano Siani Pires said it will take two to three years before full production can be restored, although around half to three quarters of the lost production could come back online sooner.
Many commodity analysts have been reluctant to upgrade their iron ore price forecasts to reflect the loss of supply as there was uncertainty over the time it would take for Vale to reopen closed mines in Brazil.
Are we about to see upgrades?
The update from the miner will now give these analysts something to work with and we may see upgrades flow through as many still believe the iron ore price will soften considerably in 2020.
If that's the case, shares like Rio Tinto and friends could enjoy a consensus profit upgrade as a US$10 increase in the iron ore price assumption will add an extra US$2 billion in free cash flow a year.
But what could stand in the way of an upgrade is US President Donald Trump. He's spoiling for a tariff tiff with China and if a full-blown trade war erupts, that could more than offset the positive sentiment towards iron ore.
