Iron ore: main producers in Brazil, economic aspects, and commodity prices

Brazil is one of the world's leading producers of iron ore, and the deposits found with potential for exploitation and those with active mining attract millionaire investments every year.

Vale is the world's largest producer of iron ore and pellets, essential raw materials for making steel. Carajás is the company's largest operation, located in the north of Brazil. Carajás ore is considered to be the best quality iron ore in the world, which is one of the factors that makes the commodity stand out in the country.

Currently, the main iron ore producing companies in Brazil are:

For some years now, the metal has been the flagship of Brazilian mining, being the main commodity produced in the country. In 2019, for example, iron ore accounted for 72.8 per cent of Brazil's mineral production, a figure that proves the importance of this metal.

In 2021, between January and July, iron ore was responsible for revenues of 107.5 billion reais, around 135% more than in the same period in 2020. However, the price of iron ore has fallen dramatically in recent months.

Iron ore thus presented a very positive scenario in the first half of 2021. However, the commodities market is strongly affected by the global economy and the production of its main buyer, China. In this sense, the economic context for the metal is changing in the second half of the year. Let's find out a bit more about this, shall we?

The term commodities comes from the English language and literally means "merchandise". Commodities are global consumer goods and are therefore traded all over the world.

Some examples of commodities:

• Agricultural: Soya, wheat, coffee.
• Mineral: Oil, iron ore, gold.
• Financial: dollar, euro, real.

Variations in the price of a commodity can be due to a number of factors, specifically in the mining sector, we can list the following scenarios:

• Demand and supply;
• Project viability;
• Processing;
• Transport;
• Political factors;
• Consumer perception;
• Competition with other minerals or materials;

When the demand for a product is much greater than its supply, its value on the market tends to rise and when the opposite occurs, i.e. its supply is much greater than demand, it is natural for its price to fall.

The set of operations that go from extracting the ore to processing it are very important in defining the value of the commodity to be mined.

In addition, it is important to take market demand into account when planning, i.e. you can't produce an ore that the market isn't interested in.

Processing consists of a series of operations that transform the extracted ore into raw materials for industry. These operations increase the mineral content, the higher the content, the higher the price.

The purchase and maintenance of equipment, loading and unloading times and the average transport distance are conditions that vary from ore to ore and affect the final price of the goods.

Administrative procedures, the ease of export determined by international relations, port tariffs and even the legislation of the exporting country all contribute to the variation in the value of the mineral commodity.

As well as selling the ore, the company must produce it with quality and responsibility. Factors such as the way the ore is mined, its processing, its environmental impact and its social impact are decisive for the consumer's perception of the company/product.

Some minerals can be replaced, so it's not worth investing in their extraction, processing and sale.

As mentioned in the topic "Factors influencing the price of iron ore", supply and demand are extremely important in determining the value of a commodity on the market.

This factor was one of the main drivers of the fluctuation in the price of iron ore throughout 2020 and 2021.

Since March 2020, when the pandemic began in Brazil, the price of ore has fluctuated and even reached historic highs. This turnaround in the economy, which hadn't happened since 2000, was due to the reduction in supply caused by the crisis.

During crises, governments invest in infrastructure in order to stimulate economic growth and recover lost jobs. During the pandemic, considered a global crisis, demand for steel increased and, consequently, so did demand for iron ore.

After about a decade with little investment, low stocks and devalued prices, in the second half of 2020 and early 2021 iron ore began to be in intense demand by major global players.

In the first half of 2021, the product appreciated by almost 40% and hit a record high of US$ 220/tonne in May. These figures were possible due to the intensification of purchases by China and the United States, two of the biggest consumers of iron ore on the planet.

However, the commodities market is very sensitive, which leads prices to fall rapidly when there are changes in the consumer market (Figure 3).

Iron ore prices began the second half of the year in decline. In August the metal showed instability and in September it fell by more than 50% compared to May (the month in which it showed the highest value of the year). This significant drop affects Brazilian mining and steel companies, which are trading lower on the stock exchange.

A number of factors have been responsible for the change in the commodity's economic scenario in recent months, two of which are directly related to China:

1. Areduction in the pace of steel production, with the aim of reducing carbon emissions in the country and keeping production similar to that of 2020;
2. Reducing energy use in the south-west of the country due to shortages in the hot climate, so steel mills that operate electric furnaces have reduced production.

Overall, the two conditions necessary for a downturn in iron ore have been met, an increase in supply and a reduction in steel production.

With production slowing down, stocks remain stable, supply on the market increases and consequently the price of the commodity is affected.

See the table below for changes in the price of iron ore since August 2020.

Containing iron ore prices continues to be a priority for the Chinese market, indicating that cuts in steel production should continue throughout the second half of 2021 (Figure 4). This means that during July-December, there is a downward trend in China's crude steel production (spglobal).

Another concern for the financial market is the crisis in the Evergrande construction company, considered to be the second largest in the Chinese market. It is estimated that the property giant has a debt of more than 300 billion dollars that it does not have the resources to pay off. In this sense, the risk of a default threatens the price of iron ore, since the sector is one of the main consumers of this commodity. This contributes to a slowdown in imports from China of the metal produced in Brazil. There is still uncertainty about the consequences of this crisis. However, it is already clear that the share prices of the main Brazilian iron ore exporters have fallen, such as Vale, which fell by 5% on 20 September.

We are following these changes closely, as they have a direct impact on the production and export of iron ore in Brazil.

What do you expect from the iron ore market in the coming months and for 2022? Share your opinion with us!

Did you like this content? Check out other texts our blog!

• Brazilian Mineral Yearbook ANM.
• Examination.
• IBRAM.
• IndexMundi.
• InfoMoney.
• Minas Júnior.
• CNN Brasil
• MoneyTimes.
• SpGLobal.
• WorldSteel.
• g1.com