Oct. 29 (Bloomberg) -- Vale SA, the world’s biggest iron- ore producer, rose the most in more than five months after the company reported profit that beat analysts’ estimates.

Vale surged 8.6 percent to 41.10 reais in Sao Paulo trading today, the most since May 4. The stock was the biggest contributor to the Bovespa index’s 5.9 percent gain today.

Vale reported third-quarter profit of 31 cents a share, topping a 28.7-cent average estimate excluding some items from 10 analysts in a Bloomberg survey. The company also said that a quicker-than-expected end to the global recession is prompting increased demand for metals.

“The result was well above what analysts were expecting,” Alexandre Miguel, an analyst with Itau Unibanco Holding SA in Sao Paulo, said in an interview. “Compared with the second quarter, the iron-ore sales volume was a surprise, really strong.”

Vale is restarting iron-ore plants idled during the economic contraction and boosting output of the steelmaking ingredient to meet higher demand from China, Europe, Japan and Brazil. Third-quarter ore shipments rose 36 percent from the previous quarter, while average prices increased about 20 percent, the company said.

“We’re extremely confident in the future,” Chief Executive Officer Fabio Barbosa said on a conference call today. “Iron-ore demand is growing on a daily basis.”

Full Capacity

Vale may soon boost iron-ore output to full capacity of about 310 million metric tons a year, Barbosa said. Overall output is set to grow 12.6 percent a year on average through 2014, he said.

“The global recession is coming to an end, with recovery taking place earlier and at a stronger pace than previously expected,” Rio de Janeiro-based Vale said yesterday in a statement. “If global economic activity continues to accelerate, there is a high probability of a renewed wave of metal price increases.”

Net income fell to $1.68 billion in the third quarter from $4.82 billion in the year-earlier period, Vale said yesterday. Sales fell 43 percent to $6.89 billion.

Vale began cutting iron-ore output by about 30 million tons on an annualized basis in November, more than competitors such as Rio Tinto Group. Iron-ore shipments rose to 73 million tons in the third quarter, from 53.8 million in the prior period.

‘Irreversible’ Trend

Vale sold a record 39.8 million tons of iron ore to China in the quarter, Barbosa said. Rising imports are an “irreversible” trend due to high local production costs, he said.

China’s expansion seems to be “gaining force,” Vale said. European steelmakers are showing “an impressive recovery” and have raised output to as much as 70 percent of capacity from between 40 and 50 percent in June, Barbosa said.

World steel output may rise 9 percent in 2010 to levels before the global financial crisis, Barbosa said.

Vale stands to benefit more from rising iron-ore demand than rivals because it has spare capacity to bring back into production, while other major producers are working at full speed, Bank of America Corp. analysts led by Felipe Hirai said. Vale also has more clients that buy through contracts, the Sao Paulo-based analyst said in a note to clients today.

Hirai said he reiterated his “buy” rating on the stock and sees prices rising 15 percent in 2010 and a further 15 percent in 2011.

Contract Prices

Chinese steelmakers, which didn’t settle contract prices with iron-ore suppliers and are buying on the spot market, are now seeking a new “united” price system for 2010, involving elements of both spot and contract prices, the People’s Daily Online reported Oct. 27.

Contract prices may increase as much as 20 percent in 2010 because of rising demand in China and an expected recovery in Europe, London-based Barclays Capital analyst Christopher LaFemina said in an Oct. 21 note to clients. LaFemina rates the stock “hold” and doesn’t own any.

Chinese spot iron-ore prices have climbed 14 percent since early September to $93.50 a ton, according to Metal Bulletin. Prices are now about 15 percent higher than some contract prices agreed between Vale and Japanese and Korean steel mills in June, said Antonio Lannes, economic affairs manager of Sinferbase, Brazil’s Iron Ore Exporters’ Association.

Limited Supply

“Supply additions for the next couple of years should remain limited, especially for copper and iron ore,” Credit Suisse analysts led by Ivan Fadel said today in a note to clients. “This combination should lead to much tighter markets, supporting high commodity prices and equity appreciation.”

Vale agreed to cut iron-ore prices for contract customers in 2009 by 28 percent, the first annual price reduction in seven years. Iron-ore pellets plunged 48 percent. Global steel output rose 13.9 percent in the third quarter compared with the second quarter on a seasonally adjusted basis, Vale said.

The company began cutting output of iron ore, which accounts for about two-thirds of sales, after customers such as ArcelorMittal, the world’s largest steelmaker, closed plants and fired workers.

Output of nickel, used in stainless steel, also slumped because of lower demand and a strike at the company’s Canadian plants. Vale resumed some operations at Sudbury, Ontario, its largest Canadian mine, on Oct. 1, using non-striking workers.

Vale sees a “sharp” recovery in metals prices as demand picks up, including purchases of nickel by stainless-steel makers, Barbosa said.

To contact the reporter on this story: Diana Kinch in Rio de Janeiro at dkinch1@bloomberg.net

Last Updated: October 29, 2009 16:34 EDT