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Investment Overview for Vale (NYSE:VALE)
Below are key drivers of Vale's value that present opportunities for upside or downside to the current Trefis price estimate for Vale:
- Iron Ore Shipments: We expect Vale's iron ore shipments to rise rapidly till 2018, due to the completion of the S11D iron ore project and ramp-up of production from the project. However, market conditions for iron ore are currently characterized by weak demand conditions and an oversupply situation. If demand does not recover sufficiently over the forecast period, Vale may be forced to reduce its planned iron ore shipments. If instead of the currently envisaged rates, shipments grow at a moderate pace due to weak market conditions, this would represent a downside of around 14% to our price estimate.
- Average Realized Iron Ore Price : Market conditions for iron ore are currently characterized by weak demand conditions and an oversupply situation. This has resulted in plummeting iron ore prices over the last year or so. We expect iron ore prices to fall till 2017, before recovering gradually over the rest of the forecast period. However, if demand and prices recover earlier and more robustly than expected, this would represent an upside of around 6% to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Vale at the top of the page.
Vale is one of the world's largest mining companies.It primarily operates in Brazil and also has operations in 32 other countries. It is the world leader in iron ore and iron ore pellets production and has access to the world's largest nickel reserves. Apart from iron ore and nickel, it also produces copper, coal, and other base metals. Vale also operates a large logistics network in Brazil which includes railroad, maritime terminals, and a port. The company also produces fertilizers and has been increasing its focus in the agriculture sector.
The company's Bulk Materials and Other division is the most valuable division for the following reasons:
Ferrous minerals are the company's primary focus
Ferrous minerals, that include iron ore and iron ore pellets, account for approximately 70% of the company's revenues. We expect that proportion to remain constant in the foreseeable future, as the company brings more iron ore projects online.
We expect the company to see solid revenue growth for ferrous minerals as the company has long-term contracts with iron and steel manufacturers worldwide, thereby safeguarding its production and mining activities.
Weakness in demand for iron ore
Iron ore is used as a raw material in the manufacture of steel. Thus, the demand for steel indirectly influences the demand for iron ore. China is the world's largest consumer of steel and iron ore. It accounts for over 60% of the sea-borne iron ore trade. Chinese steel demand growth is expected to slow to 2.7% in 2015, down from 3% and 6.1% in 2014 and 2013, respectively. Weakness in demand for steel will translate into weakness in demand for iron ore, which will put pressure on prices.
Oversupply of iron ore
A sharp increase in production volumes by iron ore majors such as Vale, Rio Tinto, and BHP Billiton will boost supply over the next few years. Given the weakness in demand, this is expected to result in an oversupply situation. The worldwide surplus of seaborne iron ore supply is expected to rise to 300 million tons in 2017, from an expected surplus of 175 million tons in 2015, 72 million tons in 2014, and 14 million tons in 2013. This oversupply situation will put pressure on iron ore prices.
Constraints in supply of nickel to boost prices
As per the provisions of a law passed by its Parliament, the Indonesian government halted the exports of unprocessed nickel ore from the country in January 2014. The country intends to boost its domestic nickel smelting capacity. Investments for the construction of around 30 nickel smelters by 2017 have been planned. However, until these new smelters become operational, Indonesia will be able to export only small quantities of nickel. Indonesia was previously the world's top exporter of nickel. A reduction in nickel exports from Indonesia will constrain global supply and boost prices.
Weakness in demand for coal
China is the world's largest consumer of both metallurgical and thermal coal. Weak demand for both kinds of coal from China, combined with an oversupply situation due to an expansion in production by major mining companies, has led to plummeting coal prices. Prices have fallen sharply in 2014 and are expected to fall further in 2015. Prices are expected to remain weak till around the middle of the forecast period.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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