Vale Lifts Output as Iron Ore-Price Drop Hits Small Mines

Vale SA, the world’s largest iron-ore producer, aims to increase production to record levels in an attempt to win back market share while higher-cost competitors are hurt by falling prices, said Executive Director for Ferrous and Strategy Jose Carlos Martins.

The Rio de Janeiro-based company can produce as much as 350 million metric tons next year, 40 million tons more than this year, Martins said in a June 14 interview. Vale is sticking with an official target of 326 million tons given in December, the press department said by e-mail yesterday.

“Forty million is something we believe is possible,” Martins, 63, said from the company’s Rio headquarters. “There is space for Vale to grow by recovering market share and by kind of squeezing high-cost producers.”

Vale is seeking to stem a slide in market share since 2007 after its biggest rivals, Rio Tinto Plc and BHP Billiton Ltd., increased output at a faster pace. While Rio Tinto and BHP, the second- and third-largest iron-ore miners, raised production of the steel-making raw material by 37 percent and 43 percent, respectively, from 2007 to 2012, Vale’s output rose 5.5 percent in the period amid environmental permit delays and aging mines.

Startups Squeezed

The Brazilian miner will weather lower iron-ore prices better than startups that began when prices were higher, Martins said. Some mines aren’t profitable when prices fall below current levels because of lower ore quality and scale, he said. Prices have fallen as much as 31 percent since February.

Vale’s first-quarter operating margin rose to 38 percent, the highest in six quarters, according to data compiled by Bloomberg. That compares with an average of 10 percent for 15 comparable mining and steel companies, the data show.

“Many of the juniors will fail,” Martins said. “I don’t think they can live with the price below $110,” he said, declining to name firms that may face financing shortages. “Many junior companies will be absorbed by big guys.”

Vale isn’t planning any more acquisitions as it continues to work on consolidating recent purchases, Martins said. “We have to digest what we ate,” he said.

Iron-ore prices may rebound “a little bit” at the end of the year before the Chinese winter after trading around $110 per ton for the next few months, Martins said. The raw material gained 2.3 percent to $117.7 a ton today, based on a price 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 analysts’ estimates compiled by Bloomberg.

Shares Drop

Vale shares declined 31 percent in Sao Paulo this year through yesterday, compared with a 19 percent drop by Brazil’s benchmark. BHP and Rio Tinto, the largest mining firms, fell 12 percent and 20 percent in Sydney and London, respectively, over the same span. Vale rose 2.5 percent to 29.10 reais at the close in Sao Paulo today to the highest since June 6.

While Vale probably will gain market share from Chinese and other small producers, it will be harder to capture volume from BHP and Rio Tinto, which are also low-cost producers, said Leonardo Brito, an analyst at hedge fund Teorica Investimentos.

“The big companies as a whole are likely to get market share from the higher cost producers in China,” he said by phone from Rio. “BHP and Rio will also increase their capacity.”

Press officials for BHP and Rio Tinto didn’t reply to e-mails yesterday seeking comment.

Expansion Delays

Vale is scheduled to start five iron-ore projects by the end of 2014 with an estimated combined capacity of 87 million tons at a cost of $8 billion, the company said when reporting first-quarter results April 24. The Carajas Additional 40 Mtpy project in Brazil’s northern state of Para and the Conceicao Itabiritos venture in Minas Gerais are planned for the second half of 2013, and the Vargem Grande Itabiritos, Conceicao Itabiritos II and the Serra Leste projects are set to start next year.

The company is also advancing with its Serra Sul S11D project in Carajas, the world’s largest iron-ore complex, which is the industry’s most expensive venture with a cost of almost $20 billion for the mine and logistics. The project is expected to start operating in the second part of 2016.

While the company is experiencing delays at expansions of its Carajas and Minas Gerais mines because of Brazil’s tight labor market, the holdups are unlikely to change its schedule, Martins said in the interview.

“It will not be a big delay because we have several projects, so one month here, two months there, three months there,” he said.

Vale’s new projects will allow the company to recover the market share lost since 2007, Martins said.

“When this new capacity comes on stream we are going to get market share back because our cost is much lower than others,” he said. “A big part of those guys are not cost effective in a lower price scenario.”

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