Why We’re Lowering Our Price Estimate For Vale To $9

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The rally in iron ore prices over the last quarter of 2016 and the first quarter of this year has come to an end, with a sharp decline in prices witnessed in April. Spot prices in the commodity declined by nearly one-third to $62 per ton over the month -long period ending April 18. [1] This decline in prices was driven by fears of an oversupply situation as a result of weakening demand-side conditions.

The iron ore rally that began towards the end of last year was driven by expectations of strengthening global demand for the commodity. China, the world’s largest consumer of iron ore, has been experiencing slowing economic growth over the past couple of years. In order to boost economic growth, the Chinese government instituted a fiscal stimulus targeting the infrastructure sector last year, which boosted the demand outlook for steel from China, and consequently for iron ore — a key input in the production of steel. In addition, the U.S. government’s planned $1 trillion overhaul of domestic infrastructure further boosted the global demand outlook for iron ore. However, there are indications that the demand growth for iron ore is likely to be weaker than expected. The growth in Chinese housing prices slowed for a fourth straight month in March. In addition, Chinese port inventories of iron ore have risen to 134 million tons, around a third more than the levels seen in the first half of 2016. These developments are indicative of the growth in demand for iron ore lagging behind the expansion in supply.

As a result of the aforementioned changes in the market conditions for iron ore, we have altered our forecasts for Vale’s iron ore shipments. Our new shipment forecast represents an 11% decline by the end of our forecast period as compared to our previous estimate.

In addition, we have also modified our margin forecasts for the company’s iron ore division. These changes to our forecasts have translated into our new $9 price estimate for Vale.

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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. Cliffs Natural Resources’ Q1 2017 Earnings Call Transcript, Seeking Alpha []