Vale Sees China Slowdown Blunted by Brazil Real Depreciation

Vale SA, Brazil’s largest exporter, said further local currency depreciation could counter cost rises and a slowdown in Chinese iron-ore demand as it seeks to regain market share from Rio Tinto Group and BHP Billiton Ltd. (BHP)

The real, the worst-performing emerging-market currency in the past three months, probably will weaken to about 2.40 from 2.15 per U.S. dollar, bolstering Brazil’s competitiveness, said Jose Carlos Martins, Vale’s executive director for ferrous and strategy. China’s iron-ore and steel demand growth is set to slow to about 5 percent from 10 percent in the first five months of the year, he said.

“The Brazilian currency will devalue further,” Martins, 63, said in a June 14 interview at the company’s Rio de Janeiro headquarters. “The slowdown in China is negative, devaluation is positive because not only our costs in dollars will be reduced but also investments will be lower.”

Vale is seeking to return to profit growth and boost investor confidence by cutting costs, selling assets and focusing on the iron-ore business, its most lucrative unit. The company, the worst-performing major mining stock this year, posted first-quarter profit that surpassed analysts’ expectations for the first time in eight quarters.

Photographer: Dado Galdieri/Bloomberg

Dump trucks transport mined iron ore at Vale SA's Brucutu mine in Barao de Cocais, Brazil. Close

Dump trucks transport mined iron ore at Vale SA's Brucutu mine in Barao de Cocais, Brazil.

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Photographer: Dado Galdieri/Bloomberg

Dump trucks transport mined iron ore at Vale SA's Brucutu mine in Barao de Cocais, Brazil.

The real lost 7.8 percent against the dollar in the past three months through yesterday to the weakest level in four years as faltering economic growth and speculation the U.S. Federal Reserve will pare back monetary stimulus lures money away from Latin America’s biggest economy. The Brazilian currency depreciated 0.9 percent to 2.1712 per dollar today, the weakest level since May 2009.

Forecasts Cut

May industrial production in China, where Vale sells almost 50 percent of its iron ore shipments, grew a less-than-forecast 9.2 percent from a year earlier, the weakest increase in the first five months of the year since 2009. China’s economic expansion held below 8 percent for the past four quarters, the first time that has happened in at least 20 years.

The world’s biggest metals consumer is expected to expand 7.8 percent in 2013, according to the median estimate in an economists Bloomberg survey last month, down from an 8 percent pace forecast in April. The World Bank reduced its forecast to 7.7 percent from 8.4 percent in a June 12 report.

China can grow 7 percent to 8 percent for the next two or three years as the economy shifts toward consumption and away from infrastructure, said Martins, who estimates he’s spent a total of a year and a half in China since joining Vale in 2004.

“As they are moving more to consumption, it’s less steel-intensive,” he said. “That’s a fact of life.”

Share Tumble

Shares in the world’s third-largest mining company declined 31 percent in Sao Paulo this year through last week, under-performing the 19 percent drop by Brazil’s benchmark Ibovespa Index. (IBOV) BHP and Rio Tinto, the largest mining firms, fell 13 percent and 21 in Sydney and London, respectively. Vale gained 0.4 percent to 28.40 reais in Sao Paulo trading today.

Iron-ore prices dropped as much as 31 percent from a 16-month high in February on weaker demand from China. The steel-making ingredient gained 1.4 percent to $113.60 a ton on June 14, based on an index compiled by The Steel Index Ltd. Prices may weaken to $100 a ton by 2016 after averaging $125 a ton this year, according to data compiled by Bloomberg.

Future Prices

China’s decision last week to scrap a licensing system for iron-ore imports may increase market transparency, reduce volatility and signal that the government of President Xi Jinping is taking a more pro-business approach, Martins said during the interview.

Vale sold 34 percent of its iron ore at spot prices on delivery at port in the first quarter, compared with 2 percent last year, the company said in an April 25 presentation. Clients in China are increasingly buying at future prices to avoid the steel-making ingredient’s fluctuations during the 45 days it takes to delivery from Brazil, Martins said.

“There is no risk for customers and so they are fulfilling their contracts,” he said.

To contact the reporters on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net; Laurie Hays in New York at lhays1@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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