The iron ore price is getting extra support after Vale SA (NYSE: VALE) cut its production guidance for 2021 and 2022.
As it stands, ASX shares are poised to rally as fears of the Omicron COVID-19 ease. The futures are pointing to a 0.6% rise in the S&P/ASX 200 Index (ASX: XJO) this morning.
Production downgrade triggers iron ore price uplift
Our biggest miners have an extra reason to cheer. Their large Brazilian rival lowered its production target to 315 million to 320 million tonnes this year. That compares to its previous goal of 315 million tonnes to 335 million tonnes.
Vale also downgraded its 2022 production estimates to between 320 million and 335 million tonnes. Consensus estimates pegged next year’s output at 346 million tonnes, reported Bloomberg.
Vale is prioritising value over volume to protect margins. This is why it’s holding back shipments of lower-quality ore.
The miner provided the update during its investor day at the New York Stock exchange overnight.
Still cashed up
This isn’t the only piece of good news it’s delivering to ASX iron ore miners. The Rio de Janeiro-based miner is flushed with cash even as the price of iron ore and other key commodities has tumbled.
This could give some confidence to ASX investors that our iron ore producers do not need record iron ore prices to keep paying big dividends.
Vale is the world’s second-largest iron ore producer after Rio Tinto. It’s also worth remembering that Rio Tinto issued disappointing production numbers more than once this year.
Iron ore price finding supply side support
The upside to the downgrades is that the supply cuts will help support the tentative iron ore price recovery.
The steel-making ingredient has plunged deep into a bear market after hitting an all-time high above US$200 a tonne. It’s currently trading around half that.
China’s orders to rein in steel production in that country triggered the sell-off. Power shortages exacerbated the drop in demand for iron ore by steel mills.
However, the iron ore price recently appeared to have bottomed around US$90 a tonne. The trillion-dollar infrastructure plan by the US and talk of Chinese economic stimulus to support the Asian giant are giving hope that commodity demand won’t be as weak as the bears are expecting.
If this is true and the supply side stays soft through 2022, ASX iron ore miners could find renewed support early in the new year.