Vale Losing to Rio Tinto as Iron Output Drops: Corporate Brazil
Vale SA (VALE5), the world’s largest iron- ore producer, is poised to lose more of its market share after production fell and its biggest rivals ramped up operations.
Output of iron ore, the main ingredient used to make steel, dropped 4.6 percent from a year earlier to 83.9 million metric tons in the third quarter, Rio de Janeiro-based Vale said yesterday. It was expected to report 82.8 million tons, the average of seven analyst estimates in a Bloomberg News survey. Rio Tinto Group, the world’s second-largest producer, on Oct. 16 reported a 6 percent gain in the period, while BHP Billiton Ltd. (BHP) said yesterday quarterly output rose 0.5 percent.
Vale this year suspended projects, announced asset sales of about $1.2 billion and cut output of premium pellet products as demand waned in China and Europe, its two biggest markets. The drop, coupled with production delays caused by heavy rain and declining resources at older mines, pared Vale’s share of the global seaborne iron-ore market to about 26 percent in the first half from almost 28 percent a year earlier, according to data compiled by Bloomberg Industries.
“There are some specific issues affecting Vale more than the market as whole,” Leonardo Alves, an equity analyst at Banco J Safra SA, said by telephone from Sao Paulo yesterday. “On the production side, that’s the lower quality at Carajas and the first-quarter rains. I don’t see a risk at this point. The company will recover from these problems in 2013.”
Melbourne-based BHP boosted its market share to almost 15 percent in the first half from about 14 percent, data compiled by Bloomberg shows. London-based Rio Tinto’s portion was little changed at about 18 percent. Rio Tinto overtook Vale to become the world’s second-most valuable mining company for the first time since 2008 yesterday. Rio is worth $2.51 billion more than Vale at today’s closing prices of their New York-listed shares, the biggest gap since November 2008, data compiled by Bloomberg shows.
Vale fell 0.5 percent to 36.15 reais in Sao Paulo today, the lowest close since Oct. 10. Rio advanced 2.4 percent to 3,260 pence at the close of trading in London and BHP gained 3.3 percent to A$34.56 in Sydney.
Production at Vale’s Carajas iron-ore mine, the world’s largest, dropped 11 percent to 27.6 million tons in the third quarter. Environmental licensing “issues” forced the company to continue mining in older, less productive pits, Vale said.
“Current performance is definitely not consistent with the high quality of our assets and corrective measures are underway,” Vale said in a statement released after the close of regular trading in Brazil.
Vale’s press officials in Rio declined to comment. Vale’s iron-ore production rose 4.2 percent compared with the second quarter of this year.
The company forecasts total output to be little changed for the full year at about 322 million tons, including 10 million tons purchased from third-party producers, Vagner Loyola, director of ferrous production planning, said Oct. 15.
“Vale recently admitted on an analyst tour the huge extent to which the miner is suffering depletion across its Brazilian ore deposits,” Melinda Moore, bulk-commodity sales executive at Standard Bank Plc in London, said in an e-mailed response to questions. “Vale’s grade and product quality declines are already evident in the market.”
Rio Tinto said its quarterly iron-ore production rose to 52.6 million metric tons, topping analyst forecasts. BHP, the world’s third-largest iron-ore producer, said output of the steel-making raw material was little changed at 39.8 million tons in the three months ended Sept. 30, in line with the 39.2 million tons median estimate from three analysts surveyed by Bloomberg.
While Vale’s iron-ore production declined 2.2 percent in the first nine months of 2012 to 234.5 million metric tons, Rio Tinto’s grew 4.5 percent to 146.9 million tons, company filings show. BHP expanded its steelmaking raw material output by 9.5 percent in the nine months through Sept. 30.
Rebounding iron-ore purchases may buoy demand as China boosts infrastructure investments, said Laurence Balter, who oversees $100 million for Fox Island, Washington-based Oracle Investment Research, including Vale shares. China’s imports totaled 65.01 million tons last month, the highest since January 2011, according to China’s customs bureau.
“All the experts and analysts who say the commodities boom is over need to look at China’s volume of iron ore at the peak of the economic cycle in 2007 and where we are today. How is it that imports have increased by 50 percent?,” Balter said by e- mail. The rate of growth has declined “but in this economic climate, I will take it!” he said.
Vale also reported late yesterday that its output of pellets, a processed form of iron ore used by steelmakers, rose 2.1 percent to 14.5 million tons in the quarter. Nickel production slumped 16 percent to 49,000 tons, copper dropped 20 percent to 68,000 tons, coal increased 91 percent to 1.73 million tons and potash fell 15 percent to 141,000 tons.
Vale said earlier this month that it will suspend output at three pellet feed plants in Brazil, representing 18 percent of total production of the material, after demand and prices fell. Iron ore, which accounts for about 90 percent of Vale’s earnings before items, slumped to $86.70 a ton on Sept. 5, the lowest since October 2009.
“We expect Vale to post weak figures, mainly due to declining iron-ore prices,” Banco Santander SA (SAN) analysts Felipe Reis and Alex Sciacio said in a Oct. 9 note to customers.
Vale, which is scheduled to release third-quarter earnings Oct. 24, is expected by analysts to say profit, excluding some items, dropped to $2.53 billion from $4.84 billion a year earlier, according to the average of four estimates compiled by Bloomberg. Earnings missed analysts’ forecasts in four of the past five quarters.
Australian producers including Rio Tinto and BHP have a geographical advantage over Vale, Philip Hopwood, global mining leader at Deloitte Touche Tohmatsu Ltd, said by telephone from Rio on Oct. 16.
“The main advantage that Australia has over Vale is proximity to the main customer,” Hopwood said. “I don’t think you can get away from the fact Australia is very close to China and Brazil is a long way away.”