Vale’s Giant Ships Get Support from Chinese Steelmakers

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Vale (NYSE:VALE) may soon see its “Valemax” vessels – the world’s largest iron ore vessels – docking at Chinese ports if the Chinese government listens to its own steel companies. The iron ore miner has faced many hurdles related to these vessels, which it ordered to tap the Asia Pacific market in which competitors Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP) hold a proximity advantage. Though it has yet to receive clearance from China, the company seems optimistic that it will do so in the next month or so. 

Our current price estimate for Vale stands at $26, implying a premium of about 25% to the current market price.

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Chinese Steelmakers Lend Support to Valemax

The company has ordered 35 of these vessels, each with a capacity of 400,000 deadweight tons, in order to reduce shipping costs to the Asia Pacific region so it can better compete with Rio Tinto and BHP Billiton. The company’s plan, however, went into tailspin as China refused to allow these ships to dock at its ports. However Chinese steel companies have now joined Vale in protesting this decision, stating that the vessels will lower costs significantly. [1] Vale is now optimistic that Chinese authorities will lift the ban, which would reduce shipping costs significantly and provide a boost to margins.

But Demand Remains a Concern in Near Term

Earlier, reports surfaced that the company idled two of its Valemax vessels for as much as a month in what could be a signal of slowing mineral demand in China after the country’s reduction of its growth target in March. Further, in April the company delayed taking delivery of two new vessels, a move that that appears to support our expectation that iron ore demand and consequently prices are likely to come under pressure. [2]

Ferrous minerals (iron ore) constitute 53% of our price estimate for Vale; accordingly any prolonged weakness in iron ore demand and prices could impact our estimate of the company’s value.

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Notes:
  1. China Steelmills Want Vale Mega Ships to Dock at Nation’s Ports, Bloomberg, May 08 2012 []
  2. Vale’s Biggest Ore Carriers Idle as Exports to China Slump, Bloomberg, April 05 2012 []
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