Chinese steel market warms up, Vale is perfectly placed

valeCompanhia Vale do Rio Doce (Vale) has recently been climbing back from lows caused by the severe drop in demand for its principle feedstock, iron ore. However, there are signs that the Brazilian mining giant may be turning the corner, as the Baltic Dry Index (BDI) has begun to show some activity off the back of speculation that the steel industry is picking up, particularly in Asia.

Vale said steel output across Asia declined by only 8.9% in the first quarter, despite the Japanese recession. This would indicate continuing strength in Chinese demand, compared to North American steel output falling by 52% & European output declining by 44%. Furthermore, Vale said its first-quarter copper output was unchanged year-on-year, aided by Chinese consumer demand for durable goods.

Steel demand is set to stabilize in the latter part of 2009, leading to “mild” recovery in 2010, according to the World Steel Association. German car registrations in March rose to the highest since 1992 after the government began paying owners to trade in old vehicles for new models. Sales in China of cars, minivans and multipurpose vehicles rose to a record in April. Car makers are the fourth-biggest steel consuming indutry, according to the association.

“The first-half will be pretty poor, but by the third or fourth quarter demand will improve,” said Peter Fish an analyst at UK based metals consulting company MEPS International Ltd. “The time is approaching when so-called destocking, in which customers use up inventories, ends and new orders will be made”

China’s imports of iron ore also spiked dramatically in February & March,  as larger iron ore producers such as Vale & Rio Tinto have been selling their iron ore to Chinese customers at a discount. Based on comments from the China Iron & Steel Association, it’s possible that small Chinese steel mills are taking advantage of the opportunity to buy higher-grade imported ore at attractive prices. Previously, imported ore was only available to large mills.

A recent report in Tradewinds shows that Vale chartered 25 Capesize vessels last month for chinese delivery, which should point to flows of iron ore resuming, although a base price for 2009 has still not been agreed with Chinese steelmakers. At present, iron ore is being sold on the spot market at roughly 20-40% discount from 2008 highs of $200 per tonne, by Rio Tinto & BHP Billiton. Valke on the other hand has dropped production & delivery in step with falling demand & has maintained last years benchmark pricing.

Chinese negotiators from Bao Steel had tried to force prices down to 60% of last years benchmark, however it would seem that Vale’s stance regards shipment may have forced China’s hand, as demand for steel is growing. Vale (NYSE : VALE) finished trading on Friday at  $17.42 off of a YTD low of $11.90 on heavier than norma buying activity.

For me Vale is in a much more enviable position than its two main competitors, Rio Tinto & BHP, as they have expended a lot of energy in last years failed takeover bid. Rio Tinto in particular is saddled with huge amounts of debt & no doubt is coming under a lot of political pressure form its would be Chinese bail out “sugar daddy”. I firmly belive that Vale will be able to add at least 50% to its stock price this year & is one of the best value buys in the commodities sector right now.

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8 responses to this post.

  1. […] SinoLinx.com Aggregated China News placed an observative post today on Chines steel market warms up, Vale is perfectly placedHere’s a quick excerptSales in China of cars, minivans and multipurpose vehicles rose to a record in April. Car makers are the fourth-biggest steel consuming… […]

  2. […] More from this article at MyStockVoice […]

  3. […] About « Chinese steel market warms up, Vale is perfectly placed […]

  4. […] readers of MyStockVoice will know that I’m a big fan of Vale, so, long VALE is a no brainer & I have felt that BHP is a little toppy for a week or […]

  5. Posted by Mesa Nahuel Germán on August 27, 2009 at 5:18 pm

    Hola, en verdad estoy muy interezado en poder ser parte de su empresa, soy tecnico quimico minero, vivo actualmente en Malargüe-Mza-Arg.

  6. Posted by aljadys yolima yejas campo on September 1, 2009 at 1:55 pm

    Hola, estoy muy interesada en poder ser parte de su empresa, soy arquitecto, vivo actualmente en Cienaga Magdalena Colombia.

  7. […] readers of MyStockVoice will know that I’m a big fan of Vale, so, long VALE is a no brainer & I have felt that BHP is a little toppy for a week or […]

  8. […] Brazil’s President Lula is presently on a global tour, having stopped in the Middle East for talks with various Arab nations regards Brazilian particpitation in oil & infrastructure projects. What has really caught my eye though is todays coverage in the Journal of Commerce regards Lula’s impending visit to Beijing. Having signed an oil for dollars deal with China last year, Lula is now courting for further cooperation between the two BRIC giants, particularly in aviation & infrastructure. Lula has already said that he is keen for the two nations to conduct busines via currency swaps, as this will ease trade & over reliance on the USD. In 2008, bilateral trade reached a record $48.98Bn, mostly in iron ore & soy products, companies such as Vale will not be slow to take advantage, as we reported in a recent post. […]

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