Vale Says China Proving Pessimists Wrong on Steel Output – by Juan Pablo Spinetto (Bloomberg News – August 8, 2013)

Vale SA (VALE), the biggest iron-ore producer, forecast a 10 percent increase in steel output this year in China, the world’s largest steelmaker. China probably will produce 780 million metric tons of steel this year compared with 683 million tons two years ago, underpinning a favorable view on the world’s largest emerging market, Chief Executive Officer Murilo Ferreira said today.

“China has once more proved the pessimists wrong,” Ferreira said during a conference call to discuss quarterly earnings. “Our view related to China continues positive.”

The shares of Vale and major rivals BHP Billiton Plc and Rio Tinto Plc (RIO) rallied today after Chinese imports climbed to the highest in 14 months and an iron-ore index reached a three-month high. The Rio de Janeiro-based company’s shares are down 27 percent this year after a slowdown in commodities demand and rising costs crimped miners’ earnings.

After tumbling 15 percent in the second quarter, iron-ore prices entered a bull market on July 26 after China replenished inventories and boosted steel output. In a presentation on its website today, Vale said a sharp drop in steel inventories in recent months opens the door to greater consumption growth.

Vale said late yesterday that second-quarter adjusted earnings before interest, tax, depreciation, and amortization, or Ebitda, fell to $4.96 billion from $5.5 billion a year ago, beating the $4.79 billion average estimate. Per-share earnings excluding items beat the average estimate by 14 percent, according to data compile by Bloomberg.

Shares Gain

“The beat was driven by yet another quarter of solid cost performance, which more than offset weaker than expected iron-ore shipments,” JPMorgan Chase & Co. analysts including Rodolfo Angele wrote in a research note. “The shares are not pricing in the implementation of changes by management, more specifically on cost reduction and growth.”

Vale shares gained 3 percent to 29.93 reais at the close of trading in Sao Paulo, its highest since June 4. Iron-ore prices rose to $133.10 a ton yesterday, according to data from The Steel Index Ltd. The price has rebounded from $110.40 on May 31. Prices traded at an average of $125.60 a ton in the second quarter, 9.9 percent less than last year.

Chinese steel production probably will grow between 3 percent and 7 percent in coming years, Vale Executive Director for Ferrous and Strategy Jose Carlos Martins, said on today’s call. Iron-ore prices are unlikely to fall below the $100 to $110 per ton level on a sustained basis, he said.

Real Weakness

“I don’t lose my sleep over China,” he said.

Net income fell to $424 million, or 8 cents a share, from $2.64 billion, or 52 cents, in the second quarter last year, after a weaker real generated losses on its $30 billion debt, Vale said yesterday.

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