Vale Earnings Fall on Sliding Iron-Ore Prices -- 2nd Update

By Paul Kiernan 

RIO DE JANEIRO--Brazilian mining giant Vale SA reported its lowest quarterly sales in four years Wednesday after slowing economic growth in China brought a sharp drop to iron-ore prices during the first three months of 2014.

Vale, one of the world's top three miners and the biggest producer of iron ore, sold the steel ingredient for an average $90.52 per metric ton in the first quarter. That was down 19% from a year earlier and was the lowest price that the company's ore has fetched since early 2010.

A drop had been expected, though Vale's complex pricing system exacerbated it. As a result, the company's revenue fell 11% in the first quarter to $9.5 billion, while profit tumbled 19% to $2.52 billion.

After years in which mining majors like Vale and Rio Tinto PLC struggled to keep up with torrid growth in China's appetite for commodities, a much-anticipated slowdown in the East Asian economy is finally putting the brakes on its demand for steel and, by extension, iron ore.

The World Steel Association said this month that it expects Chinese steel use to increase by 3% in 2014, less than half of last year's rate and the slowest pace in at least 15 years. China produces some 50% of all the steel in the world and needs to import hundreds of millions of tons of iron ore from Brazil and Australia to supply its mills, effectively setting global prices for the commodity.

But terrible air pollution, an effort to refocus China's economy on consumption rather than investment, and concerns about overcapacity in the steel industry have led China's government to clamp down on the sector. The timing is unfortunate for iron-ore producers, which have invested heavily in new capacity during recent years.

Up to 150 million metric tons of additional iron-ore supplies could hit the global market in 2014, with even more production coming online in following years, according to a report this month by Standard Bank.

That isn't great news for Vale, which relies on iron ore for some 70% of its revenue and nearly 90% of its cash generation. The silver lining is that the Brazilian company's mining costs are among the lowest in the industry thanks to the extraordinarily high quality of Brazilian ore, particularly in the Carajas region of the Amazon.

Vale is investing almost $20 billion to expand its mines and infrastructure at Carajas, aiming to roughly double its output there by 2018. Chief Financial Officer Luciano Siani said in a video posted to Vale's website Wednesday that the company has recently obtained permits to increase its iron-ore production at Carajas to 120 million tons in 2014, up from 105 million tons last year.

Write to Paul Kiernan at [e-mail]

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