Rio Tinto & Vale See Ample Demand from Chinese Growth
Chinese demand for iron ore is holding up well despite global market conditions as suppliers are bullish on Chinese consumption in the near term. In a recent note on Vale (NYSE:VALE), we wrote that expectations of Chinese demand for iron ore could reach 1 billion tons by 2015 showcasing the potential upside to the market price. Miners like Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP) are relying on the demand coming from developing nations. However, traders and analysts see an imminent increase in iron ore production in the next few years, creating a near-term oversupply in the markets.
We have a revised $34 price estimate for Vale, which is roughly 30% ahead of market price and have an $82 price estimate for Rio Tinto, which implies around 70% upside. We believe this reflects the long term value of Rio and Vale’s businesses beyond the current dip in commodity prices.
Companies Expanding Capacity on Solid Outlook
Though the companies have indicated a positive outlook regarding Chinese demand with Vale saying that there are no requests from Chinese importers to delay shipments, [1] the overall grim economic outlook has spooked investors away from mining stocks and has made most analysts lower their forecasts for Chinese imports.
Large miners like Rio Tinto and Vale have set their expansion plans for the next five years which may lead to an increase of nearly 50 percent over the total production capacity in 2011. [2] However, the demand in most countries ex-China may not be able to catch up with the supply increase going forward, which could eventually push iron ore prices down to $120 per ton by 2015. The average realized price of iron ore may vary across different companies because the quality of the ore in terms of iron content may vary.
Euro zone Concerns Overdone
The recent debt crisis in Europe has resulted in concerns regarding demand growth in the region and may have a ripple effect on the global market. However, the upside for iron ore comes from the fact that the majority of the supply increase will come in the latter part of the next five years, keeping the market’s supply and demand in balance.
Moreover, as we discussed in our previous note, if Chinese demand reaches 1 billion tons by 2015 it would likely more than offset any demand loss in Europe. The overall outlook for iron ore looks positive with Rio Tinto and Vale gearing up to increase their production levels.
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Notes:- Vale says no requests from China to delay iron ore shipments, Reuters [↩]
- Expanding Iron Ore Supply Weighs on Price, ResourceInvestingNews [↩]