Vale’s Q1 2017 Earning Review: Surging Commodity Prices Boost Results

April 28th, 2017 by Trefis Team
+32.65%
Upside
12.37
Market
16.41
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Vale released its Q1 2017 earnings results on April 27. [1] The company reported a considerable improvement in its operating margin driven by a sharp increase in the prices of most relevant commodities.

Vale Q1 2017 Earnings Review

Vale, the world’s largest iron ore producer, benefited from a resurgence in iron ore prices towards the end of last year. China is the world’s largest consumer of iron ore, with the Chinese steel industry accounting for the purchase of around two-thirds of the world’s seaborne supply. [2] The Chinese government instituted a fiscal stimulus last year targeting the infrastructure sector in order to counter faltering economic growth. [3] This stoked expectations of a sharp increase in Chinese steel production and the demand for iron ore. In addition, the U.S. government’s plans for a $1 trillion overhaul of domestic infrastructure have also contributed to a stronger global demand outlook for iron ore, translating into a sharp increase in prices of the commodity. [4] The aforementioned factors have also boosted prices of copper, a metal with extensive industrial applications, as well as nickel, which is used in the production of stainless steel.

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While the improved demand outlook boosted Vale’s results in Q1 2017, indications of weakening demand in China have resulted in a sharp decline in iron ore prices over the past month. Iron ore spot prices declined by around one-third in a month to $62 per ton on April 18 amid fears of an oversupply situation as a result of the growth in iron ore supply outstripping demand. [5] The growth in housing prices in China slowed for a fourth straight month in March, indicative of weakening demand conditions. [6] More importantly, Chinese port inventories of iron ore have swollen to nearly 134 million metric tons, around a third more than the level in the first half of 2016. [6] These rising inventories could be indicative of a worsening oversupply situation, which could keep iron ore prices subdued in the near term. Thus, though Q1 2017 was a quarter characterized by strong operating results, a decline in iron ore prices could dampen results in the coming quarters.

Have more questions about Vale? See the links below.

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 Q1 2017 Earnings Release, SEC [↩]
  2. No peak yet as China’s February iron ore imports stay strong: Russell, Reuters [↩]
  3. China Blowing Major Bubbles In 2017, Forbes [↩]
  4. Trump Begins to Map Out $1 Trillion Infrastructure Plan, Wall Street Journal [↩]
  5. Cliffs Natural Resources’ Q1 2017 Earnings Call Transcript, Seeking Alpha [↩]
  6. Iron ore price tumbles to a near six-month low, Financial Times [↩] [↩]