By Paul Kiernan
RIO DE JANEIRO--Brazilian mining giant Vale SA reported its
lowest quarterly sales in four years Wednesday after slowing
economic growth in China brought a sharp drop to iron-ore prices
during the first three months of 2014.
Vale, one of the world's top three miners and the biggest
producer of iron ore, sold the steel ingredient for an average
$90.52 per metric ton in the first quarter. That was down 19% from
a year earlier and represented the lowest price that Vale's ore has
fetched since early 2010.
Global iron-ore benchmarks had indicated a drop during the
quarter, though Vale's pricing system exacerbated it. As a result,
the company's net revenue fell 11% in the first quarter to $9.5
billion, while profit tumbled 19% to $2.52 billion.
Mining majors like Vale, Rio Tinto PLC and BHP Billiton PLC
struggled for years keep up with the torrid growth of China's
appetite for commodities. But a slowdown in the East Asian economy
is finally putting the brakes on its demand for steel and, by
extension, iron ore.
"For the first time in these last 10 years, we're experiencing a
different situation, in which supply has surpassed demand," Vale's
executive director of ferrous and strategy, Jose Carlos Martins,
said on a conference call, referring to higher production from the
company's rivals in Australia.
He added that seasonal rains in Australia were was less intense
than usual in the first quarter, further contributing to the
iron-ore supply glut.
The World Steel Association said this month that it expects
Chinese steel use to increase by 3% in 2014, less than half of last
year's rate and the slowest pace in at least 15 years. China
produces some 50% of all the steel in the world and needs to import
hundreds of millions of tons of iron ore from Brazil and Australia
to supply its mills, effectively setting global prices for the
commodity.
But terrible air pollution, an effort to refocus China's economy
on consumption rather than investment, and concerns about
overcapacity in the steel industry have led China's government to
clamp down on the sector. The timing is unfortunate for iron-ore
producers, which have invested heavily in new capacity during
recent years.
Up to 150 million metric tons of additional iron-ore supplies
could hit the global market in 2014, with even more production
coming online in following years, according to a report this month
by Standard Bank.
That isn't great news for Vale, which relies on iron ore for
some 70% of its revenue and nearly 90% of its cash generation. The
silver lining is that the Brazilian company's mining costs are
among the lowest in the industry thanks to the extraordinarily high
quality of Brazilian ore, particularly from Vale's massive Carajas
complex in the Amazon.
Many of China's domestic mines produce low-quality, high-cost
iron ore, and Mr. Martins said they tend to start closing down when
benchmark prices fall below $110 per ton. That de facto price floor
all but guarantees the profitability of Vale's operations, the
company says.
Vale also expects Chinese steel mills to start paying better
premiums for ore with a high iron content in coming years as
environmental regulators crack down on emissions.
To cash in on that situation, the Brazilian company is investing
almost $20 billion to expand its mines and infrastructure at
Carajas, aiming to roughly double output at the complex by 2018.
Chief Financial Officer Luciano Siani said the company has recently
obtained permits to increase its iron-ore production at Carajas to
120 million tons in 2014, up from 105 million tons last year.
Mr. Martins added that Vale expects iron-ore prices to recover
somewhat in the second half of 2014 as demand picks up in
China.
Investors remain skeptical, though. Vale's shares closed 1.2%
lower Wednesday at BRL26.42 and have fallen more than 19%
year-to-date.
"While we understand the lucrative margin opportunity of the
company's growth projects...we think investors would like to see a
greater degree of capital discipline in the current market
environment," said Garrett Nelson, a mining analyst at BB&T in
Richmond, Va. "Shares would react favorably to an announcement to
slow-track [Vale's] growth ambitions rather than an ostensible
intent to compete with the Australians for market share."
Write to Paul Kiernan at paul.kiernan@wsj.com
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