Home > Market change > Iron ore to stay above $150, says Vale

Iron ore to stay above $150, says Vale

July 12, 2011

“The price of iron ore will remain above $150 a tonne for at least the next five years, according to Vale, the top miner of the ­commodity. The bullish prediction by Guilherme Cavalcanti, finance director of the mining group, is the latest contribution to a debate on the outlook for the iron ore market that has polarised analysts and investors.

Used to make steel, iron ore is the largest contributor to the profitability for the three largest mining groups: BHP Billiton, Vale, and Rio Tinto. And if Vale’s forecast is correct, the three companies’ shares would be expected to rise sharply.

Asked how long he expected prices to remain above $150 a tonne, Mr Cavalcanti said ‘at least the next five years’, arguing that miners would struggle to meet booming Asian demand. His prediction, in a video interview with the Financial Times, runs against consensus thinking.”

Source: Financial Times, July 6 2011

Observations:

  • Vale’s finance director explains he is not concerned about high inflation in China as mainly the consumer goods price inflation is high, while construction activity still ensures full offtake of Vale’s production.
  • Commodity swaps indicate the market expects prices to decline steadily over the coming years.

Implications:

  • While Vale expects Asian demand for iron ore to stay strong, the companies mainly sees restrained production because of delayed development projects (often because of environmental permitting issues) and weather influences as the key driver for high prices. Together with the high inflation in equipment costs and the relatively weak dollar iron ore prices will for a prolonged time be very elastic to supply.
  • Vale’s share price is lagging behind the price of its main competitors over the past years, resulting in higher cost of debt and reduced ability to perform share based M&A. With Vale’s large exposure to the iron ore price the company would benefit strongly from higher iron ore price expectations in the market.

©2011 | Wilfred Visser | thebusinessofmining.com

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