Update: Heavy rainfall temporarily halts Vale’s rail operations and production in Brazil

Owing to heavy rainfall in the eastern Brazilian state of Minas Gerais, Vale (NYSE: VALE) has partially suspended train service on its Estrada de Ferro Vitória a Minas (EFVM) rail line, as well as production in the Southeastern and Southern Systems of its operations in the region.

EFVM is a combined cargo and passenger rail line linking the cities of Minas Gerais, Vitória, Belo Horizonte and Espírito Santo. The halt in its operations in the Southeastern System affects the Rio Piraciciba to João Monlevade part of the route, and the company says that the disruption impacts production at its Brucutu and Mariana operations. Another stretch of the same rail system, from Desembargador Drummond to Nova Era, was also halted because of the seasonal rainfall, but Vale says service will soon resume and that the disruption has had no impact on its Itabira operation.

Within EFVM’s Southern System, the heavy rainfall affected two regional highways, leading Vale to put in place a temporary halt at its production operations in the area in order to assure the safe travel of its employees and contractors, as well as the company’s mining infrastructure in the area.

The company says that it continues to monitor both the weather in Minas Gerais and its dams. It also says there has been no change in any emergency levels at any of its mining operational structures.

For Vale, the world’s largest producer of iron ore and nickel, the decision to temporarily suspend operations is likely influenced by concerns about the safety of its various facilities in Minas Gerais in the aftermath of the deadly tailings dam collapse at its Córrego de Feijão iron ore mine, located near the city of Brumadinho. The dam’s collapse on January 25, 2019, was the deadliest in Brazilian mining history, releasing some 12 million cubic metres of tailings and killing at least 259 people.

In the wake of the disaster, Vale’s then CEO, Fabio Schvartsman, lost his leadership position and in January 2020 was charged by Brazilian authorities with homicide, as were 15 other senior officials within both the company and a German firm hired to assess the stability of Vale’s dams in the country. The dam’s collapse also led to renewed calls for stronger ESG oversight within the mining industry.

In a report released January 11 that commented on the situation, Moody’s Investors Services warned that the disruption of mining and logistics operations caused by the rainfall in Minas Gerais could lead to “at least a momentary spike in worldwide iron ore prices amid production cuts and increased safety concerns over both the workforce and increasing risks for tailings dams.”

As Brazil produces roughly 20% of the global supply of iron ore, Moody’s believes any extended production disruptions would likely impact commodity prices worldwide. Nevertheless, its view for iron ore prices for 2022 remains unchanged at an average of US$100 per tonne. While lower than last year, Moody’s points out that this tonnage price is still at “historically elevated levels” even as producers “face lower steel output in China amid environmental controls, [a] weakening property construction market and energy pressures in manufacturing.”

The Moody’s report rates the impact of the temporary halt to Vale’s operations in Minas Gerais as modestly credit negative (Baa3 stable). However, should flooding in the region caused by the rainfall continue to impact production and logistical operations for companies like Vale, Moody’s says this “would likely reduce their production volumes and therefore hurt cash flow and revenue more significantly.”