Vale Rating Cut by S&P on ‘Severe’ Iron-Ore Price Drop

Vale SA, the world’s largest iron-ore producer, had its credit rating cut by Standard & Poor’s for the first time in more than eight years as a drop in the price of the commodity boosts the company’s debt burden.

S&P reduced its rating on Rio de Janeiro-based Vale one step to BBB+, the third-lowest investment grade, saying in a statement that the weakness in the iron-ore market will erode the company’s ability to generate cash. This marks the first time S&P has cut its rating on Vale’s long-term foreign debt since October 2006, according to data compiled by Bloomberg.

“The downgrade reflects our expectation that Vale’s financial risk profile will weaken in the next two years,” S&P analysts Diego Ocampo and Marcus Fernandes wrote. “We expect these metrics to gradually improve in 2016 and 2017.”

Prices for iron ore, the key raw material in steelmaking, plummeted 47 percent in 2014 as Vale, Rio Tinto Group and BHP Billiton Ltd. boosted production amid weaker demand in China. The top-three suppliers are betting added output will squeeze higher-cost competitors, helping to offset a decline in prices.

The mineral may average $65 a ton this year and 2016 and $70 a ton in 2017, S&P said in its report.

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