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Investment Overview for Vale (NYSE:VALE)
Iron ore prices have fallen sharply over the course of the past couple of years, due to oversupplied markets and weak demand. Some of the other commodities sold by Vale such as nickel, copper and coal have also been characterized by weak pricing environments. In response to the decline in commodity prices, Vale has been forced to take actions in response to the adverse business environment. However, despite the fall in iron ore prices, the company has continued to ramp up its iron ore output.
- Response to declining commodity prices
- In response to the sharp decline in commodity prices, particularly iron ore prices, Vale has focused on boosting cash flows through a combination of sales of non-core assets, reduction in capital spending, and operating costs. The company sold off $3 billion worth of non-core assets in 2015. Further, the company is on course to meet its target for a reduction in capital spending by around one-third from 2015 levels in 2016.
- Rising iron ore production
- Despite the sharp fall in iron ore prices, Vale has continued to ramp up its iron ore production. Various projects are expected to result in a growth in Vale's iron ore production from 340 millions tons in 2015 to over 400 million tons by 2020. The company is among the lowest cost iron ore miners in the world, and its operations are still profitable at current price levels.
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, iron ore fines and pellet shipments grow at a lower rate, and reach 385 million tons instead of the currently estimated 405 million tons by 2020, it would represent a downside of around 8% 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 past two years or so. We expect iron ore prices to bottom out in 2016, before recovering gradually over the rest of the forecast period. If the recovery is faster than anticipated and Vale's realized price for iron ore fines reaches $50 per ton by 2020 as opposed to $47 per ton as currently factored into our estimates, this would represent an upside of around 7% 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 65% of the company's revenues. We expect that proportion to increase 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 the purchase of nearly two-thirds of the world's sea-borne iron ore supply. Chinese steel demand declined for two consecutive years in 2014 and 2015 and is expected to decline further in 2016. Going forward, the demand for iron ore will be heavily contingent upon steel production in China. If steel production does not pick up sufficiently, iron ore prices will remain subdued.
Oversupply of iron ore
Weakness in demand for iron ore and an increase in production by iron ore majors has resulted in an oversupply situation. Though the seaborne iron ore surplus has narrowed to around 33 million tons in 2016 as a result of supply cuts by high-cost iron ore producers, a ramp up in production from the big low-cost producers is expected to boost the surplus to 100 million tons by 2018. With the oversupply situation expected to prevail in the near term, the growth in iron ore prices will remain muted.
Weakness in demand for nickel and copper
China is the world's largest consumer of both copper and nickel. Nickel is used in the production of stainless steel, whereas copper has diversified industrial applications. Weakness in Chinese economic growth has dampened demand for both these commodities, negatively impacting the prices of these commodities. Prices of both nickel and copper fell sharply over the course of 2015. With Chinese economic growth expected to remain sluggish in 2016, weakness in demand for these base metals will limit the upside for 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 fell sharply over the course of 2014 and 2015, and the weakness in pricing is expected to persist in the near term.
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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