Brazil's Vale: Iron-Ore Price Floor Still $110/Ton Long-Term

By Paul Kiernan

RIO DE JANEIRO--Brazilian mining company Vale SA (VALE, VALE5.BR) on Thursday reaffirmed its view that iron-ore prices cheaper than $110 per ton are unsustainable, despite a supply shock that has kept prices below that level for more than three months.

Vale, the world's largest producer of iron ore, reported second-quarter results in which its average sales price for the commodity was the lowest in more than four years. Benchmark prices for iron ore on the spot market have failed to break the $100 mark since late May.

The decline is testing Vale executives' long-held thesis that such prices will eventually force high-cost mines in China out of business, re-balancing the market without depressing prices.

Mining companies in Australia ramped up production faster than expected in the first half of the year, adding roughly 90 million metric tons of ore to the global export market and driving down prices.

Vale, the world's largest iron-ore producer, had previously forecast supply growth of 120 million tons for all of 2014. The company raised that estimate to 140 million tons Thursday.

Slower production increases in the second half of 2014 should allow demand to catch up, Jose Carlos Martins, Vale's executive director for ferrous and strategy, said in a conference call Thursday.

"Demand rises steadily and production grows in spurts," Mr. Martins said. "The market will become a bit less oversupplied in the second half of the year, and with that, the price outlook improves."

He declined to give a more precise forecast. Iron-ore prices at Chinese ports Thursday settled at $95.60 per metric ton, according to industry website The Steel Index.

But Mr. Martins noted that the average benchmark iron-ore price this year has still been $109 per ton.

"It's not far from $110. So that is still a good reference, although it can oscillate between a little bit more and a little bit less," he said.

Write to Paul Kiernan at [e-mail]

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