The Year 2017 in Review: Vale

The year 2017 witnessed a strong year for Vale (NYSE: VALE), with it stock price gaining close to 50% in value even though iron ore prices remained subdued in the second half of the year. The enhanced outlook for Vale was mainly driven as a consequence of the industrial curtailments initiated in China in order to fight its alarming levels of pollution.

(Source: NASDAQ)

Iron Ore Pricing & Premiums 

Vale had benefited from higher iron ore prices in the first half of the year. Iron ore prices stood higher 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. Although the fiscal stimulus had given some support to the demand for iron ore from China, doubts regarding the sustainability of this demand for the commodity led to weaker iron ore prices in the second half of the year.

(Source: Y Charts)

Despite this fact, Vale stood at an advantageous position as China underwent a structural change to cut the output of its substandard steel products in order to follow the government’s regulatory requirements to curb pollution. Chinese steel producers demanded iron ore with Fe content greater than 60% as this produces more steel per ounce of iron ore and emits less coke into the environment. ^[1] Vale’s access to high grade mines at low cost enabled the company to charge a premium for their products. Vale’s average price realized for iron ore fines in its 3rd quarter was 32% higher in comparison to Q3 2016. ^[2] This trend is most likely to continue in the upcoming quarter as well and would enable Vale to earn huge margins over its revenue.

Enhanced Production Volumes

Vale’s 9 months ended iron ore production was 6.5% higher compared to the same period last year. Strong production volumes were driven by the ramp up of production of the company’s S11D mine in the Northern System due to greater operational efficiency achieved. In Q3 2017, S11D achieved a combined physical progress of 92% which enabled it to boost its production volumes. ^[3] Moreover, the iron ore produced from Vale’s S11D mine is expected to produce high-grade hematite ore type with Fe content greater than 65% on average. ((Vale 2016 20F, Vale Financial Statements)) This would enable the company to continue to remain competitive and charge a premium for its products in the upcoming years. The increased efficiency from the S11D mine would enable the company to lower its production costs as well.

The Road Ahead

With Chinese steel demand expected to stagnate further in 2018, demand conditions for iron ore are likely to remain subdued in the near term. ^[4] However, Vale has taken appropriate actions to better align the company’s operations with the prevailing business conditions. With plans for an increase in production of high grade ores, and lower cost operations, the company is in much better shape at the end of 2017 as compared to the situation at the start of the year.

We have $10 price estimate for Vale, which is currently below the market.

Have more questions about Vale? See the links below.

• A Closer Look at Vale’s Debt Reduction Strategy
• Why has Vale Opted to Reduce its Nickel Output

Notes:

1. Iron ore prices get support from Chinese steel market strength, Metal Bulletin [↩]
2. Vale’s Performance in 3Q17, Vale Quarterly Results [↩]
3. Vale’s Performance in 3Q17, Vale News Release [↩]
4. Short Term Outlook, World Steel Association [↩]