The short-term numbers that Vale (VALE), the world’s low cost exporter of iron ore, reported on July 30 for the second quarter of 2009 were ugly but expected. Operating revenue dropped by $300 million to $5.1 billion from the first quarter. Profit margins fell to 20% from 32% in the first quarter. Capacity utilization was a low 65%.But it was the longer-term changes in Vale’s business that caught my eye.
 Demand from Europe, historically the company’s biggest customer, for iron ore has plunged. To make up for that decline, Vale has increased sales to China. That effort has come at a cost—to compete with exports from Australia that cost far less to ship to China, Vale has been eating the freight costs on about 70% of the ore it ships to China—but it has been remarkably successful. Vale’s sales of iron ore to China are up 40% from the 2008 levels and in the first half of 2009 made up 65% of the company’s iron ore sales.
The danger here is that Vale’s fortunes, already tied to China, are now even more connected to the growth of that economy.Â
The long-term opportunity, though, is that Vale will be able to keep a good part of this new trade with China even as temporary production problems at Australian producers get sorted out and even when European demand comes back. With a huge expansion in production scheduled for the rest of the decade and with the company investing heavily to build its own fleet of cargo ships as a way to lower costs, it’s very clear that Vale isn’t planning to give any of its new business back to its competitors.
Domestic Growth may help the picture. Although at a negative GDP of -1.77% for 2009 year-to-date, internal growth will continue and should help the rebound for VALE commodities.
Another aspect that appeals to me is that of all BRIC countries, Brazil is the most aligned with our own brand of capitalism.
Maybe so.viwi, but vale is the most sustainable. their own power plants, railroad, port and now they are buying dry bulk carriwers. talk about heretostay. The only thing to watch closely is govt involvement. Times are good in Brazil but when that changes you may have to become a citizen to collect your returns, Si?
Jim, most of the world’s growth of raw material consumption is based on China’s and (to lesser extend) India’s growing demands. So, if you dismiss the idea of building up on South America’s own steel production industry, China is the only place to go.
Who is the most efficient ore producer? I looked up the profit margin – it is about the same (+/- seasonal fluctuations) for all Big 3 companies.