How Vale’s Access to High Grade Iron Ore is an Advantage for the Company

November 29th, 2017 by Trefis Team
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China’s regulatory authorities have initiated a series of industrial production cuts to control its profound level of pollution. Vale (NYSE:VALE), being the world’s largest iron ore producer, is expected to be significantly impacted by these curtailments as Chinese steel producers will reduce their demand for iron ore as their production level decreases. However, Vale’s competitive position of having access to high grade iron ore at low cost has been beneficial for the company even in an unfavorable environment for steel production.

Amid an environment of capacity cuts, Chinese steel producers have cut their production for substandard steel and have increased their demand for iron ore with Fe content greater than 60% to produce steel of higher quality. Steel produced through the Basic Oxygen Furnace (BOF) method uses coke to transform iron ore to steel and thus emits a large quantity of carbon into the atmosphere. However, usage of high grade iron ore produces more steel per ounce of iron ore and consequently emits less coke into the environment. [1] Vale’s access to high grade iron mines has remained beneficial for the company in this respect, and thus, has enabled the company to sustain its current level of production and charge a premium for their products.

You can view our base case for Vale here and create different scenarios using our interactive platform.

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S&P Global Platts estimates China’s steel production to be cut by around 33 million Mt between mid-November and the end of March 2018. [2] This would have significant impact on China’s import demand for iron ore. However, Vale’s access to high grade iron ore would prove to be an advantage for the company especially in the long run.

We have a $10 price estimate for Vale’s stock, which is 14% below the market price.

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. Iron ore prices get support from Chinese steel market strength, Metal Bulletin [↩]
  2. China steel prices to fall on inadequate winter output cuts: Wood Mac, S&P Global Plants [↩]