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Vale’s Take on the Sustainable Price Level for Iron Ore

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Iron ore output

Vale’s (VALE) expected volumes for iron ore for 2017 are 365 million tons. It kept its production guidance stable at 390 million tons for 2018, capping it at 400 million tons over the next four years. That’s in keeping with its new focus on value over volume. The company has a total capacity of ~450 million tons.

Iron ore supply

Vale said there are continuous declines in iron ore grades and investments in new mines in order to maintain quality. The declines in grades have led to a consistent, structural “flight to quality” trend. Vale’s CEO (chief executive officer) Fabio Schvartsman mentioned that if iron ore prices get too high, the company has 50 million tons of spare capacity to balance out the market. However, clarifying a previous report suggesting that it will flood the market with its spare capacity if iron ore prices go too high, he said, “We will behave properly in order to balance the market. We are in a position to do that.”

Sustainable price level

Schvartsman also mentioned that a price level of $60–$70 per ton is a good level for the iron ore industry. A sustainable level of price usually refers to a level where efficient miners (XME) such as BHP (BHP), Rio Tinto (RIO), and Vale can make decent margins without incentivizing high-cost production to come into the market. Vale believes that the iron ore market will stay in balance. During its 3Q17 results, Peter Poppinga, executive director of the ferrous minerals and coal (BTU) division, said that iron ore prices are expected to exceed $65 per ton based on the forward curve for the first half of 2018 on the Dalian Stock Exchange.

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