Vale Sees Iron Rebound as Expansion Slowdown Eases Glut

Vale SA, the world’s biggest iron-ore producer, sees prices rebounding in the coming months as supply growth slows and higher cost mines close at a time of strengthening Chinese demand.

Producers will add less than 50 million metric tons of new iron-ore output from July to December compared with more than 90 million tons in the first half, helping to ease a market glut, Jose Carlos Martins, the Rio de Janeiro-based company’s head of ferrous and strategy, told reporters yesterday. The steelmaking ingredient, which has been below $110 a metric ton since April 28, is trading under the production costs of less competitive producers, putting them out of business, he said.

“The market will be better in the second half for the simple fact that there will be a lower supply growth,” Martins said. “There will be a better supply-demand balance and this will imply some price adjustment.”

Iron ore, which entered a bear market in March amid higher supply from Australia and Brazil, rose in July for the second consecutive month on speculation that demand from China, where Vale sends more than half its shipments, is improving. The raw material fell 0.4 percent to $95.20 a dry ton today, extending losses this year to 29 percent.

While the extent of the global supply expansion and demand slowdown in the first months of 2014 surprised Vale, average prices for the year are still at $109 a ton, in line with what the company sees as sustainable longer term, Martins said.

Profit Disappointment

“This $110 level is still a good reference, with little oscillations up or down,” he said in a conference call. “Demand is growing very softly so it will take some time for the market to be back in balance.”

Earlier yesterday, Vale posted second-quarter profit that rose less than analysts estimated after writing down the value of projects in Guinea and Australia and selling the mineral at a lower price. Net income climbed to $1.43 billion, or 28 cents a share, from $424 million, or 8 cents, a year earlier. The average per-share profit estimate among 13 analysts tracked by Bloomberg was 42 cents, excluding some items.

The company’s average realized iron-ore price declined to $84.60 a ton from $102.66 a year earlier, above an $80.31 estimate in a Bloomberg survey. The economic outlook for China has improved, which should also support a recovery in iron-ore prices, according to Fernando Goes, an analyst at brokerage Clear Corretora.

“There’s a big chance iron-ore prices have already bottomed out,” Goes said by phone from Sao Paulo. “China has recovered and this improvement impacts iron ore.”

Worst Performer

The outlook for Vale is picking up as iron-ore production expands and Chinese growth accelerates, Goldman Sachs Group Inc. analysts led by Marcelo Aguiar said in a July 21 client note.

Manufacturing in China, the world’s largest consumer of iron ore, expanded in July at the fastest pace in more than two years, as government policies spurred stronger growth. The Purchasing Managers’ Index was at 51.7, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today in Beijing, exceeding the median 51.4 estimate in a Bloomberg News survey and up from 51.0 in June.

A separate PMI from HSBC Holdings Plc and Markit Economics rose to an 18-month high of 51.7. Readings above 50 indicate expansion.

Project Writedowns

Vale shares declined 1.8 percent to 28.60 reais at 12:19 p.m. in Sao Paulo, extending a decline this year to 13 percent. That compares with a 1.1 percent increase by BHP Billiton Ltd.’s shares in Sydney and a 1.5 percent fall by Rio Tinto Group in London.

Vale wrote down by $774 million the value of its Simandou project in Guinea and its Integra coal mine in Australia, taking total project impairments announced by the company since 2012 to $9.2 billion. The miner is seeking that Guinea recognizes the $700 million invested by the company in Simandou as a “credit” for the future auction of the asset, Chief Executive Officer Murilo Ferreira said yesterday during the call.

The company also said yesterday it shipped 76.9 million tons of iron ore and pellets in the quarter, 6.6 percent more than a year earlier, after posting record iron-ore production for a second quarter. Pellets are a processed form of iron ore used by the steel industry.

Company Drivers

“The bulk of Vale’s production growth is set to come online in 2017 and 2018,” Nomura Holdings Inc. analyst Curt Woodworth said in a note to clients today. “Despite our view that iron ore will remain oversupplied in the medium-term, we see company-specific drivers, such as project completion and ramp up of low cost iron ore capacity.”

Global iron-ore supply excluding projects that haven’t secured financing and require approvals is expected to grow 6.9 percent this year to 1.33 billion tons as producers in Australia and Brazil ramp up projects, according to research by Bloomberg Intelligence. The market is expected to have a surplus of 10 million tons, expanding to 79 million tons next year, in the researchers’ base-case scenario.

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