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Categorized | Currencies

Vale earnings slump 60% on China cutbacks

Posted on April 30, 2015

Trucks transport mined iron ore at Vale SA's Brucutu mine in Barao de Cocais, Brazil©Bloomberg

Vale’s iron ore mine in Barão de Cocais, Brazil

Vale, the world’s largest producer of iron ore, reported its worst earnings for six years as Chinese steelmakers cut back orders, hitting the Brazilian company hard.

First-quarter adjusted earnings before interest, taxes, depreciation and amortisation slumped 61 per cent to $1.6bn from a year earlier, disappointing analysts and marking Vale’s lowest ebitda result since the second quarter of 2009.

    The plunge in Brazil’s real against the dollar added to Vale’s woes by increasing the value of its largely dollar-denominated $24.8bn net debt, forcing the company to report a total net loss of $3.12bn in the first quarter compared with a net profit of $2.52bn a year ago.

    It was the company’s third consecutive quarterly net loss.

    “Weak market fundamentals continued to undermine prices, with soft demand from Chinese steel mills and strong seaborne supply,” Vale said in a statement on Thursday.

    “Even some state-owned enterprises cut down on production levels in China and capacity may not increase back despite the Chinese government’s recently announced tax reduction on mining activities.”

    Net operating revenue fell 34 per cent to $6.24bn in the first three months compared to $9.5bn in the previous year, far lower than the $7.42bn average estimate compiled by Bloomberg. Vale’s shares fell 1.5 per cent in midday trading in São Paulo.

    Iron ore prices have slumped to a decade-low as Vale and the world’s other largest miners — Rio Tinto and BHP Billiton — have increased output to crowd out smaller rivals.

    Even some state-owned enterprises cut down on production levels in China and capacity may not increase back despite the Chinese government’s . . . tax reduction on mining activities

    – Vale

    Meanwhile, demand in China — Vale’s biggest market, accounting for 28 per cent of revenues in the first quarter — has slowed, exerting pressure on the entire industry.

    Vale has fared particularly badly because the price slump comes as the Rio de Janeiro-based company is midway through the most ambitious and costly project in its history — the development of the vast Carajás iron ore mine in the Amazon rainforest.

    The company’s first-quarter capital expenditure totalled $2.21bn, of which $1.52bn was spent on project execution, Vale said.

    However, as a result, Vale’s total iron production in the first three months of this year rose to 74.5m tonnes, a company record. Almost 37 per cent came from Carajás.

    In spite of its negative assessment of the current global steel market, Vale said there were reasons for optimism in the medium-term.

    “Looking forward, we expect some improvements in Chinese steel demand as the property sector responds to the ongoing and possibly upcoming government’s easing measures,” it said, adding that emerging markets elsewhere could also help increase demand.