Vale iron ore mine disaster negatively impacts Chinese factories

Chinese steel mills may be forced to change their way of working as a result of reduced availability of higher grades of iron ore following the collapse of a dam at a mine owned by Brazil's Vale.

The exact implications for the supply of iron ore and China's huge steel sector from the Corrego do Feijao mine breakout in Veil, which killed 142 people and 194 missing, has yet to be quantified.

On the supply side, it could face tens of millions of tons of high quality iron ore lost from the offshore market, with some estimates reaching 70 million tons.

High quality ore is exactly what Chinese steel mills have preferred in recent months, as it allows them to maximize the productivity of their blast furnaces and limit the amount of coal used and air pollution generated per tonne of crude steel produced.

Veil, however, could lose up to 9 percent of its annual production after the court orders to stop using eight tailings after the disaster.

While this has led to a sharp overall increase in iron ore prices, the type of iron ore taken out of the market is just as important.

Vale produces more high quality iron ore fines and pellets than its main Australian competitors Rio Tinto and the BHP Group.

Now, with the loss of high-quality material from Vale, the steel mills of the world's largest metal producer are faced with three main answers, none of which are perfect.

First, Chinese steel mills could replace higher quality iron ore with lower grades, which are likely to be more readily available, but this will reduce production.

Second, they can continue to use higher quality iron ore, but cut production to keep costs more or less stable and hopefully offset the rise in steel prices.

Third, they can maintain stable production using higher quality ores, but they may have to go to war in bidding against each other to ensure sufficient supplies.