Vale steels itself for changing times – by Joe Leahy (Financial Times – June 3, 2014)

http://www.ft.com/home/us

The helicopter circles over a range of verdant mountains in the Carajás National Forest, a park in Brazil’s Amazonian state of Pará.

In spite of the thick jungle on their lower slopes, some of the peaks are strangely bare. This is a clue as to what lies below the surface – a giant iron ore body known by miners as Carajás Serra Sul S11D, which decodes as Carajás southern mountain range iron ore body 11, block D.

The discovery is so large it will boost the production of Brazilian miner Vale, the world’s second-largest iron ore miner by volume, by nearly a third after it comes on-stream in 2016 compared with the company’s expected production this year of 312m tonnes. Vale claims it is the largest such project in the iron ore industry.

“We are flying above the S11D,” says Jamil Sebe, Vale’s director of northern region ferrous metal projects, above the noise of the helicopter rotors. “Where you have iron, you don’t get trees, that’s one of the ways to discover iron ore.”
Conceived during the commodity supercycle of the past decade, the $20bn project to develop S11D comes as the environment for the industry is changing radically.

Iron ore prices in May suffered their sixth monthly consecutive drop, marking a record losing streak for the steelmaking ingredient. The price retreated to $91.80 per tonne last week after averaging $135 a tonne during 2013.
Demand is not weak: monthly imports into China, the world’s biggest consumer, were the second highest on record in April, at 83.4m tonnes. The trouble is that supply is growing even faster, resulting in a global glut.

All four of the global iron ore miners – BHP Billiton, Rio Tinto, Vale and Fortescue – are spending billions of dollars expanding production and will add another 108m tonnes to seaborne supply this year and a similar amount in 2015, according to Jefferies, the broker.

These companies’ costs of production are relatively low but if the price remains depressed for a long period – Goldman Sachs predicts prices could fall as low as $80 per tonne next year – it could impact their ability to fulfil promises to shareholders of bigger returns.

“For the first time . . . we are living a different situation in which supply [has] exceeded demand,” says José Carlos Martins, Vale’s executive director for iron ore strategy.

The faltering iron ore price comes as Vale is consolidating after the excesses of the past decade. The company is concentrating on its core businesses of iron ore and base metals mining, divesting non-core assets and cutting costs.

Its cash cost of extracting iron ore rose marginally to $21.60 per tonne in the first quarter of 2014 partly on the appreciation of Brazil’s currency, the real. But, overall, Vale has saved $2bn through cost cuts in the past two years, Credit Suisse analyst Ivano Westin says.

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