Is Vale ahead of Its Peers in Managing Iron Ore Price Volatility?



Depletion-related challenges

During its investor day on September 2, 2016, Vale SA (VALE) mentioned that it’s ahead of its peers in terms of depletion-related challenges. While Vale’s depletion is 4% of total production, its peers are facing depletion in the range of 15%–30%. Vale also said it won’t invest in replacement projects until 2022 since it has enough brownfield projects to replace its production.

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Expanding price realization

The company is also working to increase its price realization. It’s adjusting quality and blending capabilities to maximize its premiums. Its Brazilian blend realization is ~$2 per ton better than the Platts benchmark.

Cost reduction

Vale has further reduced its cash break-even landed costs to China to $28.50 per ton in 2Q16, from $55.30 per ton in 4Q14. The company attributed this cost reduction to the management of its freight portfolio. It’s because of these cost reduction efforts that the company’s ferrous EBITDA (earnings before interest, tax, depreciation, and amortization) has increased $2.1 billion in the first half of 2016 compared to the first half of 2014. When S11D, its 90 million tons per annum iron ore project, comes online, Vale’s unit costs will decline further, positively impacting its earnings.

BHP Billiton (BHP) and Rio Tinto (RIO) aren’t far behind Vale in terms of landed costs. They could face depletion if they don’t go ahead with growth projects. Cliffs Natural Resources (CLF) serves the US (QQQ) domestic steel market and is looking for growth opportunities in the direct reduced iron business.

In the next part, we’ll take a look at Vale’s operating performance in its iron ore segment.


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