After Vale, the world’s largest iron ore producer, announced it would be taking40 million tonnes per year (tpy) off its output to decommission older tailings dams, local regulators cancelled the license for an additional dam used in an unrelated mine, cutting a further 30 million tonnes annually.

“Previously, our impression was that this would be a matter of a couple of weeks to resolve,” Brazilian bank BTG Pactual’s analysts Leonardo Correa and Gerard Roure wrote in a report on February 6. “Now that call is less likely [to materialize].”

The permit cancellation led Vale to declare force majeure on some iron ore and pellet contracts. Part of the production volumes was meant for exports, but local customers were also hit by the move.

“According to our channel checks, some Brazilian pig iron and steel producers are already concerned about having to reduce capacity utilization due to scarce iron ore availability,” analysts Marcos Assumpção, Daniel Sasson and Carlos Eduardo Schmidt from another Brazilian bank, Itaú BBA, wrote on February 6.

This situation arose following an accident at Vale’s Córrego do Feijão mine in the city of Brumadinho on January 25. A tailings dam failed and flooded the vicinity. So far, 165 people are known to have died as a result of the disaster and 155 more are still missing.

Vale decided to immediately decommission all of the dams built through the upstream method, the same kind that ruptured at Feijão, cutting around 40 million tpy of production in the process. These are considered to be riskier structures.

Later, SEMAD, the environmental agency of the state of Minas Gerais - where Brumadinho is located -, cancelled a permit to a dam that served the Brucutu mine. This decreases output by a further 30 million tpy. This dam was a “downstream” one, a more conventional building method.

Vale initially estimated iron ore production would reach 400 million tonnes in 2019.

The global supply decrease and the uncertainties surrounding Vale have boosted iron ore prices in the past few weeks. Fastmarkets’ 62% Fe iron ore price index hit $90.58 per tonne cfr delivered to Qingdao, China, on February 11, the highest since March 13, 2017.

Brazilian slab prices are also reacting to Vale’s output disruption. Fastmarkets last assessed export prices at $420-470 per tonne fob on February 8, higher than $410-460 per tonne in the week before.

Sources expect slab price rises to accelerate in the coming days. Some Brazilian exporters are set to test $30-50 per tonne fob increases in the February 11-15 week, after the Lunar New Year holidays ended in China.

“While this is all temporary, risks in the industry are rising and the level of uncertainty surrounding the Brazilian iron ore industry is as high as ever,” Correa and Roure at BTG added. “Unfortunately, doubts on the operational outlook for Vale will remain a key overhang and a question mark given the risk that other assets are at some point halted too.”

As the Brucutu mine operated with a “downstream” talings dam, not an “upstream” one, analysts are becoming more skeptical about negative sentiment towards the mining industry softening anytime soon in Brazil.

“It will be a bumpy ride as news flow should continue to emerge,” JPMorgan’s Rodolfo Angele and Julio Arantes wrote in a report on February 6.

Vale stated that the restriction on Brucutu’s dam has no technical ground nor a risk assessment that justifies it. The miner is taking all legal measures necessary to resume normal operation at the mine.

“Recent developments in our view significantly increase the risk of other mining operations being forced to shut down by a court decision without technical or legal basis, leading to a reduction in Vale’s iron ore shipments over the next few years,” Itaú’s Assumpção, Sasson and Schmidt added.

“It will be very confusing if judges start ruling based solely on negative sentiment towards Vale,” one source close to the country’s mining regulation told Fastmarkets. “These could have no technical support as well.”

Higher scrutiny on the industry became clearer after some 700 people were evacuated from two cities in the state of Minas Gerais close to mines. Although a rupturing risk wasn’t imminent, authorities decided it was best to remove the residents of Barão de Cocais, near Vale’s inactive Gongo Soco mine, and the people from Itatiaiuçu, near ArcelorMittal’s Serra Azul mine.

Even if a total of 70 million tonnes are cut from annual output, Vale can offset this impact by ramping up other operations. From the 40 million tonnes initial announcement, however, some 11 million tonnes are pellets, which the company has little room to compensate for.

JPMorgan calculated Vale can increase production elsewhere by up to 40 million tonnes. Morgan Stanley, on the other hand, estimated a 25-30 million tonnes increase in alternative production is possible.