Vale’s Q2 2017 Earnings Review: Higher Commodity Prices Boost Earnings

August 1st, 2017 by Trefis Team
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Vale reported an improved earnings result for the second quarter of 2017, driven by higher realized prices for the major metals produced by the company.

Vale, the world’s largest iron ore producer, benefited from higher realized prices in the second quarter. Iron ore prices stood higher in the second quarter this year largely as a result of an improved demand outlook from China, the world’s largest consumer of iron ore, post a fiscal stimulus instituted by the central government last year aimed at boosting infrastructure spending. The fiscal stimulus was instituted in order to counter a slowdown in Chinese economic growth. Going forward, the trajectory of iron ore prices would depend upon the resilience of Chinese demand for iron ore. Whereas the fiscal stimulus has given some support to the demand for iron ore from China, it remains to be seen whether the Chinese economy can sustain the demand for the commodity at current levels in the long term. The Chinese fiscal stimulus has also propped up the prices of nickel and copper, as reflected in the company’s Q2 results.

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While higher commodity prices boosted Vale’s second quarter earnings result, concerns remain over whether prices can remain at these levels. The easing of export restrictions on nickel from Indonesia and the Philippines has led to a sharp decline in nickel prices from levels seen at the beginning of the year. [1] Similarly, as mentioned previously, doubts persist over the sustainability of iron ore demand. Considering the uncertain pricing outlook, the company management has taken a cautious approach pertaining to additional capacity expansion. The company does not intend to invest in further capacity expansion for iron ore in the near term, after the completion of the S11D expansion project. [2] In addition, the company has deferred plans for further capacity expansion pertaining to its nickel mining operations. [2] Given the uncertainty about the direction of prices of nickel and iron ore going forward, the company management is right to prioritize the conservation of cash flows over capacity expansion, at least in the near term.

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 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. Nickel prices nosedive on easing supply woes, The Economic Times [↩]
  2. Vale’s Q2 2017 Earnings Call Transcript, Seeking Alpha [↩] [↩]