The Brazilian mining company, Vale SA (VALE, Financial), holds a dominant position in iron ore production, which is the raw material used for the production of steel in steel manufacturing plants. For the past few months, the iron ore prices were under immense pressure and have plummeted sharply due to glut in supply along with weakening demand in China, which is one of the major markets for iron ore. In fact, the stock has been underperforming since last July and is down 42.3% in the past 12 months. But, recently the miner had given some indication that it would probably hold back some of the supply of iron ore which could aid in stabilizing the iron ore prices. Such news positively impacted Vale’s stock that has gained almost 25.7% in the past one month.
The growth plan cut short
In an interview with the Financial Times, CFO Luciano Siani, indicated that the company would be revisiting its growth plan for the coming year. He said that the miner is now expecting to produce 340 million tonnes of iron ore this year and has estimated to produce around 376 million tonnes in 2016. He has asserted that the “standard iron ore” production might witness a cut soon if prices fall further and do not support increased production, while emphasizing upon the company’s push to pursue the production of “high-grade” iron-ore to the fullest output possible.
Such a plan of action has put its immediate rivals Rio Tinto Plc. (RIO, Financial) and BHP Billiton Limited (BHP, Financial) under pressure as they have been downsizing their operations to remain profitable in the current scenario. During such a crisis period, Vale is looking ahead to ramp up its iron ore production to gain more prominence in the iron-ore market.
Siani said during the FT interview – “We are seeing”‰.”‰.”‰.”‰the early days of a segmentation in the market… We have a lot of oversupply of more standard ore”‰.”‰.”‰.”‰but we are seeing very robust premiums for high quality ore.”
The decision to pursue production of high-grade iron ore comes as the miner fetches a significant premium over its sale to various steel producers. In fact, the ability to produce such high grade iron ore at relatively low costs enhances Vale’s stand in the present low-price environment.
Analysts are hoping that if Vale moves towards high-grade iron ore, supply for weaker grades would decline leading to easing of the supply glut which could aid in stabilizing prices of iron ore globally. Even Vale would be benefitted in the short run as was well reflected through the first quarter earnings when the EBITDA plummeted 61% to $1.6 billion year-over-year, as net revenue exhibited a slump of 34% to $6.24 billion, mainly being dragged by the existing low price trend that has led to the iron-ore price crashing in the recent months.
The immediate market reaction was optimistic
Thanks to the announcement of the company to cut back on iron ore production, the ore prices have shown a slight rebound and on May 5 were trading at $57.80 a tonne from $56.20 a tonne, capping a two-day losing streak. Now with the company concentrating more on high grade iron ore production, things seem to be looking great with respect to the iron ore prices, which should show better prices with the supply glut being taken care of by Vale which is one of the biggest players in the iron ore producers’ market. Let’s keep an eye on how such a decision taken by the company aids in oozing out the price pressure on iron-ore in the upcoming days.
