December 30, 2013 12:50 pm

Vale: mud and iron

New production capacity is coming on line in strength

The iron ore price was surprisingly high in the latter half of this year: about $130 a tonne. Good for Vale, the Brazilian miner which is the world’s biggest producer of the stuff, and which exports most of its production. Other news was less good in 2013. The company recently agreed to pay $10bn over time to settle an income tax dispute with federal authorities.

Though a third less than original claims on the company, the amount is a reminder of two things about Vale. First, it is engaged in a vast programme of cutbacks on capital expenditure so that it can remain cash-generative: $15bn in capex next year, planned to drop down to $10bn by 2016, goes with $4bn in dividends. Second, Vale’s route to cutting back – divesting assets abroad and sticking to core iron-ore operations at home – will make it feel more Brazilian as a company.

Perhaps global mining investors already feel this. Shares in Vale are down a fifth this year – more in line with the 17 per cent decline in the Ibovespa than the share price performance of another miner refocusing on iron ore, Rio Tinto (down 7 per cent).

It would be easier to be bullish about Vale if it was still easy to be bullish about iron ore prices after the run of 2013. But it is not. New production capacity is coming on line in strength – about 400m tonnes’ worth outside China during the next three years, 120m tonnes of which will be from Brazilian mines. Chinese demand stayed strong this year: steel production there grew 9 per cent, more than gross domestic product growth. This is unlikely to repeat in 2014, given a government campaign to slash environmentally toxic overcapacity. The relatively iron-rich ores Vale digs from its vast Carajas mine might benefit from a cleaner, less coal-intensive Chinese industry. But Vale is still a volume player. Getting from here to there will be tricky.

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