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Is Vale Setting a Trend of Iron Ore Capacity Rationalization?

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Curtailing capacity

During its conference call, Vale S.A. (VALE) reiterated its plan to reach 450 million tons of iron ore capacity by 2018. Management mentioned that the company could take out 30 million tons of iron ore from its Southern and Southeastern systems, depending on market conditions. The capacity the company could curtail would basically be higher-cost and lower-quality compared to new capacity in the Northern system.

The market welcomed this move, and iron ore stocks, including Vale’s, gained after the news. You can see this as an uptick in the graph above. This move would be positive for Vale, as it would help improve its margins.

BHP Billiton (BHP) also commented during its production results release that it’s deferring the Inner Harbor debottlenecking project. This will lead to a slower pace for its planned capacity of 290 million tons per annum. The market took this news positively as well.

Rio Tinto (RIO), on the other hand, is standing firm on capacity expansions. During its annual general meeting on May 6, CEO (chief executive officer) Sam Walsh said, “This year in the Pilbara we will continue our low-capital-cost brownfield expansions as we grow our capacity.”

The CEO of Cliffs Natural Resources (CLF) mentioned during the company’s 1Q15 results call that major miners will have to cut back on their expansion plans since additional returns will not justify their huge investments.

Such cutbacks could be positive news for the ailing iron ore industry, which is grappling with oversupply and a weak Chinese demand. For that to happen, planned curtailments will have to take effect and more curtailments will have to be announced in order to match supply with demand.

BHP and VALE make up 17.8% and 2.6%, respectively, of the iShares MSCI Global Metals & Mining Producers ETF (PICK).

Investors can also consider the SPDR S&P Metals and Mining ETF (XME) to get exposure to this sector.

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