Vale’s Q3 2016 Production Review: Iron Ore Production Outlook Lowered Amid Challenging Market Conditions

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Vale reported marginal growth in its third quarter iron ore production and lowered its production guidance for next year, as the company adjusts its iron ore output to a subdued iron ore pricing environment. The company reported a 1.5% year-over-year increase in iron ore fines production in its Q3 production report, having lowered or stopped production from some of its lower margin operations in the quarter. [1]The company also lowered its production guidance for next year, as illustrated by the table shown below.

Vale Production Guidance 2017

An oversupply situation in the global iron ore market has kept a lid on the prices of the commodity. Rising iron ore output from major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has boosted the global supply of iron ore. However, declining demand for steel from a slowing Chinese economy has translated into weakness in iron ore demand from China, which accounts for the purchase of nearly two-thirds of the world’s seaborne iron ore supply.

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China Steel Demand Growth

As a result of the weak demand conditions and oversupplied markets, even low-cost iron ore producers such as Vale are looking to scale back their iron ore output, as weak pricing negatively impacts margin and cash flows. Slowing iron ore production growth from Vale mirrors the decline in production growth at Rio Tinto, which has become selective about investing in new iron ore projects amid a weak pricing environment. The silver lining from Vale and Rio Tinto’s perspective is that these companies can operate profitably at current levels of iron ore prices. In the case of Vale, economies of scale and the commencement of mining from the company’s low-cost S11D iron ore mine is set to lower production costs further, as illustrated by the following break-even cash cost projections.

Cash Break Even For Iron Ore Landed In China

However, despite the declining production costs, with demand-side weakness set to continue in the near term, weakness in iron ore prices are likely to limit the upside for Vale’s margins in the near term. Thus, a significant improvement in Vale’s business prospects is unlikely in the near future.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Vale
Notes:
  1. Vale’s Q3 2016 Production Review, Vale Website []