Iron Ore To Get Cyclone Rusty

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– Tropical Cyclone Rusty expected to make landfall today
– Port Hedland and Dampier ports already closed
– Supply disruptions expected
– Possible short term run in spot prices

By Andrew Nelson

It’s either the product of a good sense of humour, or a wonderful example of natural irony, but either way a tropical cyclone that has been named Rusty is headed towards the biggest iron ore production area on the planet.

The storm has already shut down the major Western Australia iron ore export ports of Port Hedland and Dampier, while Apache Energy has also stopped production at its Stag oil facility off the coast of Western Australia. The question is: how much more harm can it cause? The answer is: we’re about to find out.

The Australian Bureau of Meteorology (BOM) expects the storm to make landfall in the Pilbara sometime this morning and notes that given this is a large but slow moving storm, it will likely to result in rainfall that is heavier than what is typically associated with a cyclone. Very heavy rain is expected along the coast of the eastern Pilbara and western Kimberley over the next few days, with 200-300mm or even more rain possible in some areas. The rainfall is expected to cause major flooding in the De Grey catchment.

Once Rusty does make landfall, the storm is expected to weaken gradually, but the BOM notes it will still usher in some torrential rain and also poses a serious risk of flooding in many inland parts of Western Australia until later this week.

Analysts at Commonwealth Bank note there is the distinct possibility of production, rail and shipment delays and even outages over the coming few weeks. This could have come at a worse time, notes CBA, given the Chinese central government has just recently issued tighter guidelines for real estate lending, which has spooked both the steel and iron ore markets. Chinese real estate construction activity is obviously a negative for steel and thus iron ore demand.

The Silver Lining: If Rusty really does do some damage and makes a noticeable dent in iron ore supply, spot prices could rally for at least the next few weeks.

CBA notes the most immediate impact on iron ore supply has to do with port shut-ins. The closure of Port Hedland affects BHP Billiton ((BHP)) Fortescue Metals ((FMG)) and Atlas Iron ((AGO)), while the closure at Dampier hits Rio Tinto ((RIO)).  CBA notes the latest information suggests Port Hedland could sustain more damage than Dampier, but either way, a week-long closure of both ports will in itself remove around 8Mt from seaborne markets.

The big problem is, this is only the tip of the iceberg. The real potential for disruption comes from damage to infrastructure and mines due to winds, rain and flooding. Apart from the major flooding expected in the De Grey catchment, significant flooding is also likely in the Fortescue catchment and in Pilbara coastal streams.
 

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