Replies to post #3347 on The Rising Influence of Rising Affluence

[DewDiligence]

Iron-Ore Demand is Fine, Says VALE’s CEO

http://finance.yahoo.com/news/Brazils-Vale-CEO-No-problems-rb-3486330832.html?x=0&.v=2

›Sunday August 21, 2011, 10:38 am EDT

SAO PAULO (Reuters) - Brazil's Vale (Sao Paolo:VALE5.SA; NYSE:VALE), the world's third-largest mining company, has yet to change its investment plans or suffer any canceled or modified shipments because of the global crisis, its CEO said in an interview published Sunday.

Murilo Ferreira said that unlike the 2008-09 crisis when Vale was forced to reduce production and lay off workers, this time around, credit and financing lines have remained intact, allowing the trade of iron ore and other commodities to continue.

"Life goes on as usual at Vale and, as a result, things are going as planned. We had a very good July," Ferreira told Estado de São Paulo newspaper.

Vale remains "strongly optimistic" about its key market of China, Ferreira said, although he acknowledged concerns about high inflation there that could eventually translate into dampened demand.

Ferreira also said Vale continues to pursue the goal of being one of the world's top three fertilizer producers. Brazil's government has tried to nudge Vale toward that goal as part of its strategy of diversifying the country's industrial base, raising some concerns among investors about official interference in the company's affairs.

Being a leader in fertilizer production makes good business sense, Ferreira said.

"I'm not going to give up on a project because somebody thinks we're being oriented by the government," he said.‹

[DewDiligence]

given CLF has greater exposure to the US iron ore market, do you think at this point - with what looks like a slowdown in the west - vale or rio/bbl are the better investments (as more pure china plays)?

The iron ore CLF produces in the Upper Midwest is generally sold to US steelmakers under take-or-pay contracts. (This ore is mostly in the form of pellets that are customized for the blast furnaces used by US steelmakers.) If US steel production were to decline precipitously, CLF would be affected more than VALE, RIO, and BHP/BBL, but there would be a lag before the impact would be felt in CLF’s sales and earnings. (I do not expect a precipitous decline in US steel production, but that’s a separate question.)

I noticed that seaborne iron ore is factored into the formula for cliffs iron ore pricing, but do you know how much weight this is given relative to other components in the equation (i.e if weighted heavily i am less concerned about #1 above)

CLF’s pricing formulas vary from customer to customer and are tightly guarded. What we do know is that the global spot price of iron ore is an increasingly large component of the formula.

input prices in australia seem to be increasing. to what degree will this offset growth and profitability for the australia miners?

Rising input prices have an effect, of course, but they are in no way surprising. There has never been a bull market for commodities in which the input prices did not rise.

given the above would you say VALE is the best bet at this point? i know there is some political meddling but the PE is most attractive (although given its size i don't know about growth potential relative to a smaller company like CLF)

VALE’s dirt-cheap valuation is more than enough compensation to investor for the political risk, IMO. The new CEO, Murilo Ferreira, presents as a level-headed business executive, not a zealot. Ferreira’s philosophy (as I interpret it) is that there’s a benefit as well as a cost in maintaining good relations with the federal government; as long as the cost is not excessive, investors should consider it the “entry fee” for a Brazilian company to conduct business on a global scale.

should i just keep my money in cash given the market turmoil?!

I presume that your question is rhetorical :- )

do you still think CLF is a buyout candidate?

Yes.

[DewDiligence]

An Ear to the Ground on Metals Prices

http://online.wsj.com/article/SB10001424053111903596904576516262982399464.html

›AUGUST 22, 2011
By CLARE ANSBERRY And DAVID FICKLING

Metals, a normally volatile lot, have been even wilder during the past few weeks.

Any hint of where prices are headed—up, down or sideways and for how long—will be of particular interest when BHP Billiton Ltd., the world's largest miner, reports its fiscal-year results on Wednesday.

Prices for key commodities, including iron ore, copper and coal, have risen between 22% and 52% in the first half of the year compared with the same period a year earlier. Most mining companies had been predicting that prices will stabilize at current high levels, making for a strong second half.

In spite of escalated concerns about the European sovereign-debt problems and potential double-dip recession in the U.S., the outlook remains relatively unchanged due to two basic fundamentals: Supply is constrained and global demand, while moderating, is still growing.

Indeed, slowdowns in the U.S. and European Union are expected to be offset by emerging-market demand, even amid monetary-policy-tightening initiatives in huge markets such as China. Weather-related production cutbacks, labor shortages and infrastructure bottlenecks, as well as labor strikes in Africa, have limited output for iron ore, copper and coal, likewise tightening supply and keeping prices firm for the medium and long term.

Spot prices have softened in some cases over the past few weeks, which could provide bargain opportunities for purchasing managers, who aren't dependent on quarterly contracts, and cause others to postpone purchases in anticipation of prices falling further. But the medium- and long-term price outlook remains strong.

"The combination of strong demand growth and industry supply challenges gives us confidence that real long-term prices and margins for almost all the minerals and metals will continue at elevated levels albeit, of course, with heightened price volatility," Rio Tinto PLC Chief Executive Tom Albanese said during an Aug. 4 conference call, when the Anglo-Australian company said its first-half net profit rose 30%.

Of more concern are the pace of credit tightening in developing countries; rising costs of existing projects, due to labor and equipment shortages and infrastructure limitations; and uncertainty regarding efforts by governments to tax minerals, or secure ownership stakes in the mines and their profits.

More than 25 countries either announced or implemented changes to tax and royalties, which is giving mining companies pause about new, longer-term commitments. "Resource nationalism is probably, from a strategic standpoint, one of the largest sector challenges we face at the moment, and probably for the next few years," Mr. Albanese said [see #msg-61247388].

Several big mining companies have already reported their earnings and, for the most part, reached parity in predictions that the Asian economy has the capacity to offset the crises in the Western world. Mining companies are expecting gross-domestic-product growth in China of between 7% and 9.5%. Demand in Japan is expected to be strong due to rebuilding efforts after the earthquake earlier this year.

China accounts for roughly 40% of iron ore and iron pellets for Brazilian mining giant Vale SA. Vale, which posted a 74% rise in second-quarter net income, said its average sales price for iron ore in the second quarter was $145.30 per metric ton, up 58% from the year-earlier period, and that it expects iron-ore prices to stabilize at current high levels [#msg-65731503].

"Even if China demand moderated, growth in Indonesia and India is moving ahead," said Mike Elliott, global leader of Ernst & Young's mining and metals division. "Growth won't be a strong as we thought three or four months ago because of the European and U.S. situations, but we still see prices relatively buoyant."

One of the last major miners to report, BHP has the benefit of sobering hindsight from the market and commodities meltdown. Analysts expect net profit to reach about $22 billion for the fiscal year, up 74% from the year earlier, driven largely by higher iron-ore production and a near doubling of iron-ore prices.

Investors will be interested in any hints of softening prices, diminished demand outlooks, or changes in investment plans. The company spent close to $17 billion this year taking over shale-gas producers in the U.S., and is spending more than $9 billion in Australia this year on expansion projects.

In Australia, where mining accounted for 60% of exports in 2010, companies are placing a series of big bets that industrializing China and India will continue to fuel demand for resources such as iron ore and coal. The government is projecting a 33% increase in capital spending on resources and energy projects in the year to the end of June 2012. Much of the investment is directed to developing new mines or expanding production in sparsely populated Western Australia state, especially the dusty Pilbara region that accounts for 40% of the global seaborne trade in iron ore.

This spending is likely to go ahead regardless of global economic disruptions, according to Alan Copeland, manager for resources at the Bureau of Resources and Energy Economics, an Australian government agency. "The process of constructing a project includes contracting or engaging other parties to undertake work or provide equipment. Once these contracts are signed, it can be complex to undo them," he said. However, "to the extent that market conditions may change, companies may re-evaluate the timing and economics of particular projects."‹