The Rising Influence of Rising Affluence

[DewDiligence]

Iron Ore Will Stay Above $150/tonne, Says VALE (again)

[This echoes and expands on what VALE said two months ago (#msg-63709939, #msg-63709939), but some investors evidently don’t believe it. If most investor believed it, it’s doubtful that VALE would be trading at the fire-sale valuation of 7-8x likely 2011 earnings (#msg-62877175).]

http://www.ft.com/cms/s/0/9e4cc704-a7fb-11e0-afc2-00144feabdc0.html

›July 6, 2011 7:38 pm
By Jack Farchy in London

The price of iron ore will remain above $150 a tonne for at least the next five years, according to Vale, the top miner of the commodity.

The bullish prediction by Guilherme Cavalcanti, finance director of the mining group, is the latest contribution to a debate on the outlook for the iron ore market that has polarised analysts and investors.

Used to make steel, iron ore is the largest contributor to the profitability for the three largest mining groups: BHP Billiton, Vale, and Rio Tinto . And if Vale’s forecast is correct, the three companies’ shares would be expected to rise sharply [CLF too].

Asked how long he expected prices to remain above $150 a tonne, Mr Cavalcanti said “at least the next five years”, arguing that miners would struggle to meet booming Asian demand.

His prediction, in a video interview with the Financial Times, runs against consensus thinking. [See the link above for the video.]

The shares of BHP, Vale and Rio are pricing in a rapid decline from near-record prices of $174 a tonne for benchmark grades of iron ore delivered to China to $100 or below as soon as next year, analysts say.

However, a growing number of iron ore bulls believe prices will remain at elevated levels for several years, as higher costs, delays and logistical problems prevent miners from sufficiently boosting supply.

“There’s a massive disconnect between equity valuations and underlying price forecasts,” said Melinda Moore, commodities analyst at Credit Suisse.

“I think people are still believing there’s a wall of supply to come next year or the year after.”

Vale last week cut its target for iron ore production in 2015 by 10 per cent, while BHP has revised up its cost estimates for a large planned expansion in Western Australia.

Other smaller miners are also facing project delays and cancellations for reasons ranging from a shortage of skilled labour to the cost of building infrastructure around the new mines.

Sinosteel, a state-owned Chinese metals producer, said last month it was suspending work on a $2bn iron ore project in Australia because of setbacks in developing infrastructure.

“There’s a plethora of issues which are causing underperformance on the supply side,” said Colin Hamilton, commodities analyst at Macquarie. “Bringing a new iron ore project to market is as hard as it has ever been.”

The sluggish delivery of new iron ore projects means the market will be forced to rely on small Chinese iron ore miners to meet demand, analysts say.

Mining equities have also been pressured by concerns about a slowdown in Chinese commodities demand. But Mr Cavalcanti said Vale had seen no slowdown in iron ore sales to the country: “We continue to sell everything we produce.”‹