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What Is Vale’s Iron Ore Price Outlook?

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Iron ore price weakness is seasonal

Vale’s (VALE) CEO mentioned during Vale Day that the recent weakness in iron ore prices was expected due to the start of the winter season in China. Also, steel capacity cuts in China are lower this year as compared to last year, while steel mills are following the same approach of producing more in advance. This has led to additional weakness in iron ore. Lastly, the trade war between China and the US (SPY) (IVV) is adding to the pressure. Vale is trying to position in a way so as to avoid losses in this situation by holding off its inventory at the end of the year to take advantage of price recovery at the beginning of next year.

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Sustainable price level

Vale also mentioned that it is comfortable with iron ore prices ranging between $60$80 per ton as they have been for the last few months. If prices fall below this range, Schvartsman said, “That will be part of our job not to burn our product at the wrong price.” A sustainable price level 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.

Vale also mentioned that due to the “flight to quality” in China (FXI), its competitors (XME) are facing a depletion of their mines. At this point, Vale is the only large mining company that has more capacity coming online through its S11D project.

Changing pellet contracts to 65% Fe basis

Another important development for the company related to its iron ore division is that it is negotiating a change in its iron ore pellet contracts from the current 62% Fe to 65% Fe. Vale’s executive director of ferrous metals and coal, Peter Poppinga, said during Vale Day, “if both of those indexes, $65 and pellets, are linked to productivity in the steel plant. So by switching to $65 index, there would be a natural hedge, a natural hedge for the blast furnace guys to tackle any productivity need.”

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