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What’s the Outlook for Vale’s Iron Ore Division?



Iron ore price realization

Vale’s (VALE) ferrous division accounted for ~82%.0% of its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) in 2Q17 as compared to ~89% in 1Q17. Its EBITDA for this division fell 44% quarter-over-quarter. This was mainly due to the 27% decline in the iron ore benchmark index during the quarter.

Iron ore’s price realization during the quarter fell as a result of this decline in benchmark prices. Its CFR (cost and freight) reference price for 2Q17 was $60.7 per ton as compared to $86.7 per ton in 1Q17.

On the other hand, the sales volumes for iron ore rose from 63.7 million tons in 1Q17 to 69.0 million tons in 2Q17. Higher sales were mainly due to the continuing ramp-up of S11D and weather-related seasonality during the first quarter.

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Cost increases

While iron ore’s realized prices fell during the quarter, the C1 cash costs rose by $0.5 per ton from 1Q17 to $15.2 per ton in 2Q17. Higher costs were due to higher railway tariff, higher demurrage costs, and higher maintenance costs. The depreciation of the Brazilian real against the US dollar offset some of these price increases during the quarter.

Peers’ costs

As compared to Vale, its peer (PICK) Rio Tinto (RIO) had a unit cost of $13.8 per ton for its Pilbara operations in 1H17. BHP Billiton (BHP) will release its fiscal 2017 results, which ended on June 30, on August 22, 2017. Its unit cash costs for iron ore for the half year ended December 2016 were $15.5 per ton. While Cliffs Natural Resources (CLF) has different drivers as compared to its seaborne peers, it has also reduced its production costs in the United States due to headcount reduction and other input costs.

After having looked at iron ore, let’s look at how Vale’s focus on costs is affecting its profitability in the coal division.


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