Here’s Why We’re Revising Our Price Estimate For Vale to $3

+34.61%
Upside
12.19
Market
16.41
Trefis
VALE: VALE logo
VALE
VALE

The rapid decline in iron ore prices over the past year has negatively impacted the prospects of Vale (NYSE:VALE), the world’s largest iron ore producer. A combination of a global supply glut and weakening demand from China, the world’s largest iron ore consumer, has resulted in a sharp reduction in iron ore prices. In addition, an accident at Vale and BHP Billiton’s joint venture iron ore operations, Samarco, negatively impacted Vale’s production at the site in 2015 and will impact production levels in 2016, as well. As a result of a combination of these factors, we are revising down our price estimate for the company.

Extended Downturn In Iron Ore Prices

Iron Ore Prices, Source: Y Charts

The chart shown above illustrates the approximate 30% decline in iron ore prices over the course of the past twelve months. [1] Prices a year ago were roughly one-third of the levels prevailing in 2011.

Relevant Articles
  1. Forecast Of The Day: Vale’s Average Realized Iron Ore Price Per Ton
  2. Is Vale Stock A Buy As Iron Ore Prices Rise?
  3. What’s Happening With Vale Stock?
  4. Trading At A Mere 4x Earnings, Is VALE Stock A Buy?
  5. Why Did VALE Stock Decline Sharply In Recent Weeks?
  6. Company Of The Day: Vale

As mentioned previously, the prevailing supply glut, resulting from weak Chinese demand in the face of rising global production has negatively impacted prices of iron ore. China is the world’s largest consumer of iron ore. Besides utilizing domestically produced iron ore, the Chinese steel industry also accounts for the purchase of approximately two-thirds of the world’s seaborne iron ore supply. [2] As iron ore is used as a raw material in the production of steel, the demand for steel is an indicator of the underlying demand for iron ore. As a result of a slowdown in Chinese economic growth, domestic demand for steel in China is expected to decline for the third consecutive year in 2016. [3] However, rising production from iron ore majors such as Vale and Rio Tinto has boosted global supply, resulting in an oversupply situation. Though the closure of high cost production capacity has reduced the extent of the oversupply, the surplus of seaborne iron ore supply is expected to rise to 97 million tons by 2018 from an expected surplus of 65 million tons in 2016. [4] With the oversupply situation expected to persist over the next couple of years, we have revised down our pricing forecasts for iron ore.

Samarco Accident

The bursting of an iron ore tailings dam associated with the Samarco iron ore mining operations in the Minais Gerais state of Brazil led to the suspension of iron ore production at the site. Samarco, a joint venture between Vale and BHP Billiton, could be looking at a $4.8 billion fine for the damage caused by the bursting of the dam. [5] Apart from the fine, as per company estimates, the accident could impact Vale’s 2015 and 2016 production figures by 3 million tons and 9 million tons, respectively. [6] We have accordingly lowered our sales forecasts for Vale.

As a result of downward revisions to our pricing and shipment forecasts for Vale’s iron ore operations, our new price estimate for the company stands at $2.95.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

 

Notes:
  1. Iron Ore Spot Prices, Y Charts []
  2. China Plans Iron Ore Subsidy for Miners Amid Rout, News Says, Bloomberg []
  3. Short Range Outlook 2015-2016, World Steel Association []
  4. Iron Ore Outlook Cut by Morgan Stanley as Supply Floods Market, Bloomberg []
  5. Mine Disaster: Brazil Nears $4.8B Samarco Settlement, teleSUR []
  6. Vale on Samarco’s accident, Vale News Release []