By Paul Kiernan
RIO DE JANEIRO--Brazilian mining giant Vale SA reported its
lowest quarterly sales in four years Wednesday after slowing
economic growth in China brought a sharp drop to iron-ore prices
during the first three months of 2014.
Vale, one of the world's top three miners and the biggest
producer of iron ore, sold the steel ingredient for an average
$90.52 per metric ton in the first quarter. That was down 19% from
a year earlier and was the lowest price that the company's ore has
fetched since early 2010.
A drop had been expected, though Vale's complex pricing system
exacerbated it. As a result, the company's revenue fell 11% in the
first quarter to $9.5 billion, while profit tumbled 19% to $2.52
billion.
After years in which mining majors like Vale and Rio Tinto PLC
struggled to keep up with torrid growth in China's appetite for
commodities, a much-anticipated slowdown in the East Asian economy
is finally putting the brakes on its demand for steel and, by
extension, iron ore.
The World Steel Association said this month that it expects
Chinese steel use to increase by 3% in 2014, less than half of last
year's rate and the slowest pace in at least 15 years. China
produces some 50% of all the steel in the world and needs to import
hundreds of millions of tons of iron ore from Brazil and Australia
to supply its mills, effectively setting global prices for the
commodity.
But terrible air pollution, an effort to refocus China's economy
on consumption rather than investment, and concerns about
overcapacity in the steel industry have led China's government to
clamp down on the sector. The timing is unfortunate for iron-ore
producers, which have invested heavily in new capacity during
recent years.
Up to 150 million metric tons of additional iron-ore supplies
could hit the global market in 2014, with even more production
coming online in following years, according to a report this month
by Standard Bank.
That isn't great news for Vale, which relies on iron ore for
some 70% of its revenue and nearly 90% of its cash generation. The
silver lining is that the Brazilian company's mining costs are
among the lowest in the industry thanks to the extraordinarily high
quality of Brazilian ore, particularly in the Carajas region of the
Amazon.
Vale is investing almost $20 billion to expand its mines and
infrastructure at Carajas, aiming to roughly double its output
there by 2018. Chief Financial Officer Luciano Siani said in a
video posted to Vale's website Wednesday that the company has
recently obtained permits to increase its iron-ore production at
Carajas to 120 million tons in 2014, up from 105 million tons last
year.
Write to Paul Kiernan at paul.kiernan@wsj.com
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