Vale Resists China Price Cut Request on Demand Gain: Week Ahead
July 27 (Bloomberg) -- Vale SA, the world’s biggest iron-ore producer, is resisting Chinese demands for record pricecuts as the steel industry recovers from its biggest collapsesince World War II.
Vale agreed last month to a 28 percent lower price on ironore supplied to Japanese steel mills under annual contracts,the first reduction in seven years, while China pressed for adiscount of as much as 45 percent. Iron ore in the open markethas jumped 38 percent since this year’s contract prices werefirst set, weakening China’s position.
Chief Executive Officer Roger Agnelli said June 25 that hewon’t give Chinese customers bigger discounts in what havebecome the longest-running price talks ever. China’s detentionof iron-ore executives from Rio Tinto Group, the world’ssecond-largest iron-ore exporter, on allegations of espionagehas created a split between Australia and China that may alsobenefit Vale, according to McKinsey & Co.
“The possibility of Chinese steelmakers achieving abigger discount is very, very unlikely,” Paul Cliff, a mininganalyst with Nomura Securities in London, said in a July 22interview. “Either the Chinese agree to the current benchmarkalready set or they buy on the spot market.”
Vale, based in Rio de Janeiro, has risen 35 percent in SaoPaulo this year, compared with a 45 percent gain for theBovespa stock index. Rio advanced 97 percent in London, whileBHP Billiton Ltd., the world’s third-biggest iron-ore exporter,rose 23 percent. Rio is based in London and BHP in Melbourne.
China Steel
China’s steel output, which accounts for about half theworld’s total, rose 1.2 percent in the first half, the WorldSteel Association said July 20. Production will climb about 5percent this year as the nation’s $586 billion infrastructurestimulus package takes effect, according to Gilberto Cardoso,an analyst with Banif Securities in Rio.
The recent slump in global steel industry production, withmany companies operating at half usual output levels, marks thebiggest collapse since World War II, according to the WorldSteel Association.
The Chinese Iron & Steel Association didn’t immediatelyreturn calls from Bloomberg News seeking comment.
This year’s contract talks between China and producerssuch as Rio and BHP began in January and passed the June 30deadline without an agreement, becoming the longest-running inthe 40-year history of setting annual prices. Vale, Rio and BHPcontrol about 70 percent of the seaborne trade in iron ore.
Vale Profit
Vale may report second-quarter net income of about $1.12billion on July 29, according to the median of three estimatesin a Bloomberg survey, compared with $5.01 billion a yearearlier, after prices fell. Iron ore contributed about 73percent of the company’s $19 billion of earnings beforeinterest, tax, depreciation and amortization, known as EBITDA,last year.
China depends on imported ore because more than half thenation’s 800 million tons of iron-ore reserves are unviable atcurrent prices, said Sigurd Mareels, a Brussels-basedconsultant with McKinsey. Iron content in Chinese mines islower than Vale’s Carajas ore, according to London-based CRU,which provides data and pricing on commodities.
Contract prices are tumbling after Rio and BHP won gainslast year of about 85 percent before the economic crisis led toslumping demand. Vale vowed this year to wait for itscompetitors to reach agreements with steelmakers first after itsecured a lower price increase last year of about 65 percent.
Price Setter
Jose Carlos Martins, head of Vale’s ferrous-metalsbusiness, said in February Vale wouldn’t be the traditional“price setter” in contract talks this year.
“Politically Vale has done well with its customers byletting the Australians settle first,” Cliff said.
In the first quarter, China took 66.5 percent of Vale’stotal iron-ore sales of 52.1 million metric tons, up from 32percent a year earlier.
“The benchmark is already set,” Agnelli said June 25,referring to the agreements with steelmakers in Asia and Europefor 2009 deliveries of iron-ore fines, the most commonly-tradedproduct. “But we won’t leave the Chinese without ore.”
Vale may benefit from China’s dispute with Rio overallegations that employees of the company allegedly stole statesecrets, according to McKinsey’s Mareels. The country, whichbuys 70 percent of the world’s seaborne iron-ore supplies,detained four Rio executives on July 5. The investigation hasstrained relations between China and Australian Prime MinisterKevin Rudd.
China Talks
The China Iron & Steel Association is holding price talkswith Vale instead of Rio after the detentions, the AustralianFinancial Review reported July 16, without saying where it gotthe information. A Vale spokeswoman said July 24 that thecompany has no additional comment following the statementsalready made by Agnelli on iron-ore pricing.
The number of spot iron-ore vessels booked from Brazil toChina rose to a record in July while those from Australiadropped, Reuters said July 22, citing freight broker AXSMarine.
Since Agnelli’s June 25 statement, prices for Indian spotore sold into China have risen to $95 a ton, the highest thisyear, according to London-based publication Metal Bulletin.Prices are now about 19 percent higher than contract prices.
Vale is “strong enough to resist Chinese demands´´ forconcessions, said Robert Meyer, a Dusseldorf-based vicepresident of Research & Consulting Group, in a July 22interview.
Ore Imports
China’s ore imports, which rose 29 percent in the firsthalf, will exceed 50 million metric tons a month until the endof 2009, boosting global seaborne trade in iron ore to a record880 million tons this year, according to McKinsey’s Mareels.
“Spot prices will rise further as other markets outsideChina recover,” Banif’s Cardoso said in a telephone interview.
Vale may reopen its 7 million-ton-a-year Gongo Soco minein Brazil’s Minas Gerais state in “coming months” amid signsof economic recovery, Agnelli said July 7.
China’s economy has grown at an average rate of more than9 percent a year over the past decade and should continue atthat clip, Barclays Capital analysts including ChristopherLaFemina said in a July 17 research report. That will fuelhigher demand for steel and iron ore, he said.
“We expect infrastructure development in emergingeconomies to be a driving factor of above-trend steel demandgrowth for many years,” Barclays said.
Markets
The Bovespa index rose 4.6 percent to 54,457.29 last week,led by homebuilder Gafisa SA, which climbed 21 percent, andsugar-cane processor Cosan SA Industria e Comercio, whichgained 17 percent. BRF Brasil Foods SA, the country’s largestfood processor, led declining shares with a 5.3 percent drop.
The yield on the local-currency zero-coupon bonds dueJanuary 2010 fell 13 basis points, or 0.13 percentage point, to8.69 percent. Brazil’s real strengthened 1.6 percent to 1.895per dollar.
The following is a list of events in Brazil this week:
Event DateFIPE Weekly Consumer Price Index July 27Current Account Figures - June July 27Foreign Direct Investment - June July 27Financial System Loans - June July 28Government budget balance - June July 29Vale SA’s earnings - second quarter July 29FGV IGP-M Inflation Index - July July 30Monetary Policy Committee Meeting Minutes July 30To contact the reporter on this story:Diana Kinch in Rio de Janeiro at dkinch1@bloomberg.net
Last Updated: July 26, 2009 19:26 EDTSource: Bloomberg
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