Source Mining Web
The global leader in seaborne iron ore increased exports to China by 42% in the first half of 2009, on a year-on-year basis.
Author: Barry Sergeant
JOHANNESBURG -
In one of the most useful global mining reviews published by any company anywhere, Vale, the world's No 2 miner by value, observes that China's iron ore imports grew 29% year-on-year in the first half of 2009, to 297.2m tonnes, not least on the back of stronger fundamentals for China's property sector, which uses about 40% of new steel output. The substitution of Chinese high-cost domestic iron ore production - China normally ranks as the world's biggest iron ore miner - tends to become gradually replaced by increasing consumption as the main driver for the demand for imported iron ore.
China's crude steel output accelerated to an annualized rate of 600m tonnes in June, increasing by 5.4% in the second quarter, relative to the first quarter, on a seasonally adjusted basis. Vale states that it has been successful in its efforts "to exploit the strong recovery in Chinese iron ore imports: in 1H09 our shipments increased 42.1% on a year-on-year basis".
On a net basis, demand for iron ore across the world was of course down over the period: from a peak quarterly sales number of 77m tonnes in the third quarter of 2008, Vale's sales volumes fell to 50m tonnes in the first quarter of 2009, and rose marginally above that to 51m tonnes for the second quarter.
| Vale | 1Q08 | 2Q08 | 3Q08 | 4Q08 | 1Q09 | 2Q09 | | Iron ore volumes (mt) | 68.297 | 70.876 | 77.004 | 47.846 | 49.829 | 50.668 | | Year-on-year | | | | | -27.0% | -28.5% | | Cumulative (mt) | | 139.173 | 216.18 | 264.02 | | 100.5 |
The sharp decrease in Vale's iron ore sales, combined with certain price adjustments, saw a sharp decrease in the group's profitability for the second quarter of 2009, somewhat offset by rising profits from its non-ferrous division, which includes a variety of metals and minerals, from copper to potash. Vale's ferrous division (mainly iron ore) EBIDTA (earnings before interest, depreciation, tax and amortisation) was at USD 1.5bn for the second quarter of 2009, compared to the eye-popping USD 5.1bn reported for the third quarter of 2008.
| Vale, EBITDA*, USD bn | | | | | | | 1Q08 | 2Q08 | 3Q08 | 4Q08 | 1Q09 | 2Q09 | | Ferrous | 1.958 | 4.311 | 5.094 | 2.524 | 2.212 | 1.459 | | Non-ferrous | 1.825 | 1.919 | 1.342 | 0.236 | 0.155 | 0.413 | | Logistics | 0.142 | 0.220 | 0.177 | 0.092 | 0.029 | 0.091 | | Coal | -0.018 | 0.014 | | 0.094 | 0.043 | -0.007 | | Other | -0.178 | -0.246 | -0.239 | -0.249 | -0.158 | -0.231 | | | 3.729 | 6.218 | 6.374 | 2.697 | 2.281 | 1.725 | | * Earnings before interest, tax, depreciation and amortisation. |
Back in the present tense, Vale observes that "the Chinese economy, driven by credit expansion and infrastructure investment growth, boomed in 2Q09, expanding at the margin, on a seasonally adjusted basis, well above its long-term trend rate. Domestic demand is growing in a robust fashion, minimizing the negative influence of still declining exports".
Recent Chinese economic dataflow points to a 12% year-on-year increase in June in new construction starts. Vale sees this as "naturally" following the rebound in property sales that has been taking place since March: "The bounce back in construction activity gives an important support to a sustained recovery of domestic demand while at the same time has positive implications for the evolution of iron ore demand, since property is responsible for almost 40% of Chinese steel consumption".
Vale's iron ore production has been running "at a relatively high level of idle capacity - production in 2Q09 was at an annualized pace of 230 million metric tons". As such, Vale sees itself as "prepared to exploit the upside of the iron ore market; this is quite a different position from our main competitors, who are working at almost full nominal capacity".
Looking wider than this, Vale observes that "in response to the demand improvement, world crude steel production increased by 4.7% in 2Q09, on a seasonally adjusted quarter-on-quarter basis, after falling by 3.1% in 3Q08, 18.8% in 4Q08 and 2.7% in 1Q09. Moreover, June statistics are showing production increases in Brazil, the US and the European Union, regions where the carbon steel industry was running at the lowest rates of utilization in the world. By the same token, global stainless steel output is recovering after two consecutive years of decline: it increased 23.1% in 2Q09, on a seasonally adjusted quarter-on-quarter basis, after dropping by 6.2% in 3Q08, 27.7% in 4Q08 and 2.1% in 1Q09".
IRON ORE PRICES
Vale observes that "spot iron ore prices have risen strongly over the last three months". Citing a number of rising underlying indicators, Vale expects "to see global industrial production increase over the next couple of quarters with growth spreading to developed economies as well, shaping a globally synchronized upturn", while at the same time believing that "there are still significant downside risks to the recovery scenario".
Moving forward, Vale has implemented a new iron ore marketing policy, "involving among other things a more flexible stance towards iron ore pricing, sales on a cost and freight basis and the enlargement of our client base". Vale cites as "a prominent feature of our stronger competitiveness in China" the development of a low-cost portfolio of maritime freight primarily supported "by our own large capesize vessels and medium and long-term contracts of affreightment with shipping companies".
Vale's main seaborne iron ore competitors are, of course, Rio Tinto and BHP Billiton, which enjoy a relatively short haul to China from ports in north Western Australia, where ores are loaded from mines 1,000 to 1,300km down the railroads in the Pilbara.
Vale is employing recently acquired large second-hand ships and in the near future will be able to use the 400,000 dwt very large ore carriers ordered from shipyards. Simultaneously, Vale is consolidating a new price structure, "in which the recognition of the superior quality of our products is being evidenced through price premia over ores from other sources".
Vale adds that "due to the conclusion of the destocking process, steel output in other regions of the world, such as Brazil, the European Union and Japan, and, consequently, iron ore demand, are generating the first signs of recovery".
Without referring to the recent arrest of Rio Tinto iron ore executives in China, Vale notes that it has settled benchmark prices for 2009 with its main clients in Europe, Japan and South Korea. Definitive settlements have not yet been made with any major Chinese customer by any of the Big Three seaborne iron ore names.
| Contract iron ore prices | | | | | | USD per dry metric ton unit | | | | | | | Vale | | 2007 | 2008 | Change | 2009 | Change | | For certain customers | | | | | | | | Southeastern System fines | NA | 1.1900 | NA | 0.8543 | -28.2% | | Carajás sinter feed | | NA | 1.2520 | NA | 0.8987 | -28.2% | | Southeastern System lump | NA | 1.7900 | NA | 0.9942 | -44.5% | | Southern System lump | | NA | 1.8200 | NA | 1.0094 | -44.5% | | Prices for ArcelorMittal | | | | | | | | Southeastern + Southern System fines | NA | 1.3450 | NA | 0.9651 | -28.2% | | Carajás sinter feed | | NA | 1.4055 | NA | 1.0095 | -28.2% | | Southern System lump | | NA | 1.9750 | NA | 1.0962 | -44.5% | | Pellet BF | | NA | 2.2000 | NA | 1.1384 | -48.3% | | Pellet DR | | NA | 2.42 | NA | 1.2523 | -48.3% | | Rio Tinto | | | | | | | | Yandicoogina Fines | | 0.8042 | 1.4466 | 79.9% | 0.9700 | -32.9% | | Pilbara Blend Fines | | 0.8042 | 1.4466 | 79.9% | 0.9700 | -32.9% | | Pilbara Blend Lump | | 1.0264 | 2.0169 | 96.5% | 1.1200 | -44.5% |
Vale observes that due to higher cyclicality and volatility, "in the downturn the demand for pellets tends to be negatively affected earlier and more strongly than the demand for iron ore fines. On the other hand, in the upturn its initial reaction is slower but it tends to grow faster than the demand for iron ore. Given the recent increase in the activities of the global steel industry, the narrowing of the price premium of pellets over iron ore fines is stimulating the beginning of a recovery in pellet sales from the unprecedented low levels of 1H09. In July we resumed operations of one plant at Tubarão while we are taking steps to re-start another Tubarão plant. During 2Q09 we had only five pellet plants in operation out of a total of ten".
On a broader scale, Vale faces increased competition from its two main seaborne iron ore competitors. In early June, Rio Tinto and BHP Billiton announced that BHP Billiton would pay Rio Tinto USD 5.8bn "for equity type interests at financial close" to take its interest in the two companies' Pilbara, Australia iron ore joint venture from 45% to 50%. This values the full joint venture at USD 116bn, more than the market value of any mining company in the world, bar BHP Billiton.
The iron ore joint venture shortly followed Rio Tinto's abandonment of its posed near-USD 20bn capital injection from smaller rival China State-owned Chinalco, replaced by the announcement of a general rights issue to raise the equivalent of USD 15.2bn, and the deal with BHP Billiton. Unlisted Chinalco, a Chinese state enterprise, with stakes in listed Chalco and Jiangxi Copper, represented China's biggest attempt yet to spread its mining wings abroad.
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