“Vale estimates that investments of around R$ 5 billion ($1.3 billion) will be necessary to decommission its upstream dams and estimates that the decommissioning process will occur over the next 3 years,” the company said on Wednesday.

To carry out the decommissioning of the upstream dams safely and quickly, Vale will temporarily halt the production of units where the structures are located, namely the Abóboras, Vargem Grande, Capitão do Mato and Tamanduá operations, in the Vargem Grande complex; and the Jangada, Fábrica, Segredo, João Pereira and Alto Bandeira operations, in the Paraopebas complex, also including the stoppage of the Fábrica and Vargem Grande pelletizing plants, it added.

“The estimated impact of the production stoppage is about 40 million tons of iron ore per year, including in this figure the pellet feed needed for the production of 11 million tons of pellets, an impact that will be partially offset by the increase in production of other systems of the company,” the miner said.

Vale’s decision to decommission the dams follows the rupture of a tailings dam at the Córrego do Feijão mine near the city of Brumadinho, in the state of Minas Gerais in south-east Brazil, on January 25.

The failure resulted in the loss of lives amid flooding of the nearby areas.

Prices on Dalian Commodity Exchange reacted positively to the news of potential supply tightness in the iron ore market, with the most-traded May iron ore contract on the exchange opening at 587.50 yuan ($87.18) per tonne and hitting the daily upper limit within two minutes of trading at 589 yuan per tonne, 5.9% or 33 yuan per tonne higher than Tuesday’s settlement level of 556 yuan per tonne.

The contract price only softened slightly before the 3pm close to end Wednesday at 587 yuan per tonne.

Singapore Exchange’s 62% Fe iron ore cfr China futures also reacted to the news.

As at 1.16pm Singapore time, February month contract trades averaged $86.57 per tonne, up from the February month average of $79.34 per tonne the previous day.

“The market will be bullish for the short term; it is a natural reaction [to the news of production cut],” a Singapore-based trader told Fastmarkets.

“While Brazilian fines product prices will see an uptick, in the long term the market will adjust itself,” the trader said.

“Let’s not forget that steel mill margins are very tight now, so these mills may look for more affordable alternatives in any way,” he added.

Another participant said that stocks of Vale’s material at the ports in China and Malaysia where the miner has blending and distribution centers may recede, however, overall seaborne supply may not see a major impact.

“The pellet premiums on the other hand are expected to rise,” he said.

Another steel mill source said that “lower output may not equal lower shipments as Vale may ramp-up output from other mining areas and other Brazilian miners may also ramp up shipments”.

The end-user source also pointed that January-March was seasonally a dull period for Brazilian shipments and that factor may also mitigate some of the impact.

But market participants are uncertain how regulatory scrutiny in Brazil over mining operations may affect shipments over the course of the year.

Fastmarkets MB’s 62% Fe Iron Ore Index was at $78.69 per tonne cfr Qingdao on Tuesday, up $0.51 per tonne from $78.18 per tonne cfr on Monday.

Fastmarkets MB’s 62% Fe Iron Ore-Low Alumina Index was at $80.19 per tonne cfr Qingdao on Tuesday, up by $0.38 per tonne from previous day’s $79.81 per tonne cfr .

Fastmarkets MB’s 65% Fe Iron Ore Index
stood at $92.20 per tonne cfr Qingdao on Tuesday, up by $0.60 per tonne from $91.60 per tonne on Monday.

July Zhang in Shanghai and Deepali Sharma in Singapore contributed to this report.