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Will Vale’s Realized Iron Ore Prices Take a U-Turn in 2016?

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Lower iron ore price realization

Vale’s (VALE) CFR (cost and freight) realized iron ore price fell by $5.50 per ton from $61.50 per metric ton in 2Q15 to $56.0 in 3Q15. The average Platts Iron Ore index fell $3.50 per ton from $58.40 per ton in 2Q15 to $54.90 per ton in 3Q15. After adjusting CFR iron ore price with freight-on-board (or FOB) sales and moisture, Vale’s FOB price for iron ore fines stood at $46.50 per ton in 3Q15. The lower iron ore prices have negatively impacted the margins of the company.

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Iron ore price calculation for 3Q15

Vale’s iron ore sales were calculated using three different pricing systems. 49% of sales were calculated using daily spot or monthly or quarterly prices and provisional price sales (sales settled within 3Q15). 38% of sales were based on the provisional prices settled on the delivery date. The rest of the 13% of sales were linked to past prices.

Reasons for lower iron ore price realization

There are many reasons for lower realized iron ore prices in 3Q15. The first reason is that the Platts 62% IODEX provisional price for iron ore was set at $51.5 per ton at the end of 3Q15. The end price was lower than the average IODEX price of $54.9 per ton for 3Q15. This has reduced the price realization by $1.1 per ton. Another factor was that adjustments made to provisional prices set in 2Q15 have negatively impacted the prices by $0.7 per ton in 3Q15.

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Lower premiums on iron ore pellets

Vale’s CFR/FOB pellet prices fell by $6.1 per ton to $75.9 per ton in 3Q15 from $82.0 per ton in 2Q15 while the benchmark price (average Platts IODEX) fell $3.6 per ton in 3Q15. The fall in Vale’s realized pellet price was higher than the fall in the Platts IODEX. This was due to the lower pellet premiums in 3Q15.

Challenging price environment for iron ore

Iron ore price continued its southward trend and fell 6.1% in 3Q15 to $54.9 per ton due to lower demand from steel, its major consumer industry. The steel industry was impacted by the slowdown in China and other developed markets. However, Vale expects the global steel demand to recover in 2016. Overall, iron ore prices will continue to have a challenging environment in the short term. Prices are unlikely to see a reversal in 2015. If the global steel demand picks up in 2016, it will drive the realized prices upward in 2016.

Cliffs Natural Resources (CLF) is a key pellet producer while BHP Billiton (BHP) and Rio Tinto (RIO) have pellet operation through joint ventures. BHP and RIO form 31.2% of the iShares MSCI Global Metals & Mining Producers ETF (PICK).

In the next article, we’ll discuss the performance of the coal segment. We’ll analyze production, profitability, and the cost of Vale’s coal business in 3Q15.

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