Vale: Iron ore price to improve second half of the year

Murilo Ferreira, CEO of Vale.

Murilo Ferreira, CEO of Brazilian mining giant VALE (NYSE: VALE), knows how to talk his book – he’s regularly been the most optimistic about the direction of the iron ore price of the large producers.

The Rio de Janeiro-based miner’s first quarter results disappointed with earnings falling 19% and sales of $9.5 billion coming in more than $1.5 billion below expectations in large part due to lower iron ore realized prices.

During the earnings call Ferreira was undeterred:

“We expect that the price in the second half will be better than the first half. One thing is for sure the price will not go below $110 on a sustainable basis. I think we have many time seen the price going below this level, but recovering very fast […] because those are the level that many producers mainly in China will leave the market

Ferreira, at the helm of the $70 billion firm since May 2011, does caution that since supply is going to be steady, his prediction would depend on improvement on the demand side “not only in China, but outside China.”

The good news is that Vale is already seeing early signs of a pick-up in Europe. Europe is responsible for 18% of Vale’s business compared to 33% for China.

As the Asian country’s demand slows as expected it should put Vale in a relatively better position than the number two and three producers Rio Tinto (LON:RIO) and BHP Billiton (LON:BHP).

Vale has been struggling to keep up with the Pilbara producers which enjoy cheaper shipping to China, but Vale’s cutbacks has seen cash costs for iron ore production trimmed to $21.60 a tonne.

Vale plans to lift exports from the current 311 million tonnes per year to 450 million tonnes by 2018. As giant projects like S11D in the Carajas complex come on stream Vale says going below the “psychologically important” $20 is achievable.

The import price of 62% iron ore fines at China’s Tianjin port was $145.40 at tonne on Wednesday ahead of the Chinese labour day holiday, levels last seen mid-March when the steelmaking raw material fell to a near 18-month low.

The price of 62% iron ore never strayed from $10 – $14 a tonne for more than 20 years (1991 was a banner year – miners got all of $15.03 for their haul). The state of affairs was due to secretive negotiations and annual contracts.

Then at the end of 2004 all hell (for Chinese steelmakers that is) broke loose. The Big 3 – Vale, BHP and Rio – decided enough is enough and put up the price 72%, marking the start of a supercycle and the beginning of the end of the old pricing system.

Compared to 2011 and 2012 the market was uncommonly stable last year, particularly in the second half with the steelmaking ingredient trading between $130 and $140 a tonne for 148 days straight.

The last time iron ore traded below $100 was a brief period in September 2012, before it recovered to above $150 in February last year.

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