Vale slashes iron ore production, trims nickel output

Saying that it is “adjusting to the new global economic scenario,” iron ore giant Vale (RIO-n) is dramatically scaling back its iron ore mining in Brazil in order to cope with an estimated 20% production cut by the world’s steelmakers.

Vale notes that, as a bulk product with large-scale operations, iron ore demands mine-railroad-port-maritime shipping integration and doesn’t physically allow for substantial inventory buildup in expectation of demand recovery.

Vale is thus chopping its iron ore production by an annual rate of 30 million tonnes, or about 10%. It is shutting down some higher-cost, lower-quality mines in its Southern and Southeastern Systems in Minas Gerais state, beginning Nov. 1. Idled employees will have “collective vacations.”

Two pellet plants, representing about 20% of Vale’s total nominal capacity, will be shut down for maintenance from November onwards.

Speaking before analysts and media in New York City on Nov. 3, Vale CEO Roger Agnelli said that the broader markets are “showing the crisis is much bigger than anybody could accept even three months ago.” He said October was a month when Vale’s customers were hit with a flurry of cancelled orders, forcing many to close their blast furnaces.

“Our markets are working relentlessly without a pattern; we have lost the benchmark,” Agnelli said. “But the problem today is not really price. The problem for everybody, the whole industry, is demand. There are some markets that are completely, completely stuck, without any view, without any vision, because the adjustment is very strong in a very short period of time.”

Emphasizing that Vale is “in very good shape,” the Brazilian-born former banker said the company is “not in a hurry. We need to calm down and analyze what’s going on, talk with our clients. We have to prepare ourselves for the cold times, so that we are covered, and we have to prepare ourselves for the summer, when the good times will come. So if we do a good housekeeping, we will have the fruits.”

Agnelli said that eventually, “we’ll see the bottom of this crisis, and we will be able to build some forecasts, some strategies on how to face the near and medium-term future.”

With respect to Vale’s customers, Agnelli added, “I always say that we are not in the same boat, but we are in the same river, going in the same direction. So we need to cooperate with our clients, be together, team up with them to go through this situation that has not been easy for anybody.”

Agnelli dismissed talk that the Chinese were now angrily refusing to buy iron ore from Vale in response to the miner’s ill-fated attempt to prematurely reopen contracts and raise iron ore prices this fall.

“There is no boycott,” Agnelli said flatly. “I like to say that we love the Chinese, and I believe they love us, too, because Vale is the company that has most contributed to the steel mills in China. We have met the demands when they most needed us, including investments for the Olympics and so on.”

He noted that, thanks in part to Chinese demand, Vale has tripled its iron ore production in five or six years.

While Agnelli acknowledged that the Chinese would go elsewhere if they could get better prices and Vale would sell to other customers if they would pay more, he reiterated that the real problem is that there’s no demand.

Vale recognizes that the slowdown of global industrial production has also negatively affected the demand for other base metals, such as aluminum, manganese and nickel — already reflected in declining prices and rising inventories.

So, in its aluminum business, Vale is shutting an aluminum smelter in Rio de Janeiro state. Vale’s Brazilian aluminum subsidiary operates at relatively high costs, mainly due to high electricity prices. Vale is also constraining its kaolin business to 70% of nominal production capacity.

As well, Vale’s manganese ore and ferroalloy operations in Brazil will be shut during December and January, while its Dunkerque ferroalloy plant in France will be kept idled until April. A plant in Norway will have its furnace maintenance extended until June. These moves will cut production at an annual rate of 600,000 tonnes of manganese ore and 90,000 tonnes of ferroalloy.

“Oh, God. It’s hard to predict these things,” Agnelli responded in exasperation to a question about nickel’s future. “The nickel price, at the current level, is not sustainable for the current cost base. A big part of the producers will be out of the market, or they’re already out of the market.”

He said that “some correction is necessary for that. But before this correction is over, the market will reach the minimum, minimum price possible. Why? Because there are a lot of economic agents that need to make money and they need to sell at any price. In some cases, nickel is on sale.”

At its Indonesian nickel operations, acquired via its high-profile takeover of Canada’s Inco, Vale will stop using higher-cost thermal power generation and rely solely on hydroelectric power, which will lead to a reduction of nickel-in-matte output by 20%, or about 17,000 tonnes annually.

“It was only reasonable to produce at this cost when the market was paying higher prices,” said Agnelli. “At this price, it’s better to cut production.”

Meanwhile, Vale’s nickel refinery in Dalian, China, will keep running at 35% of its nominal capacity.

Vale is recommitting to completing the construction and ramp-up of two very large nickel laterite mines: Goro, in New Caledonia and Onca Puma, in Brazil. The company is commissioning Goro now and Onca Puma next year, but it will be starting up both operations at the minimum rate of production possible, just to keep the machinery working, waiting for better nickel prices.

“If we enter now at full capacity, it will affect much more the physical market,” Agnelli said.

The nickel market is very volatile, he said. “It is necessary to have further consolidation in this industry because, historically, you make money with nickel for two or three years, and then you give back for two or three years, so the sum is zero. That’s the reality of the industry.”

The good news for Canadians is that Vale’s substantive, low-cost nickel operations in Canada — Sudbury, Voisey’s Bay and Thompson — were not singled out for major cutbacks.

Regarding Vale’s longer-term, aggressive plan for production growth through the development of greenfields projects, Agnelli said the company believes the market will expand again and that it needs to invest in infrastructure so that it has the capacity to cope with an eventual recovery.

Vale has a “huge pipeline of investments,” he said. “Nobody in the industry has the size or the number of projects that Vale has. We can really keep growing the company for the next ten years without any problem.”

Coming off an excellent third quarter that generated US$4.8 billion in profits on US$12.1 billion in revenue, Vale now sits with more than US$15 billion in cash plus open credit lines. So, naturally, several questions were posed regarding Vale’s desire to buy more companies or assets.

“If a very good opportunity appears, we will be reacting to that,” Agnelli answered. “Maybe it will be a surprise, even for me. If I feel something is good, I will go for it. Geologists love to make a lot of concepts, to deliver gossips. Every day I hear six, seven different opportunities in Africa or elsewhere.”

However, while the depressed market capitalizations of some rival companies may make them attractive takeover candidates, Agnelli stressed that organic growth is more profitable, and yields greater returns for shareholders, especially in light of favourable exchange rate fluctuations and deflation in terms of equipment prices and services.

“We are going to enter into a very good moment for new investments,” Agnelli said. “We don’t know exactly how is the real situation of all the companies; we need to wait a little bit to see the balance sheets.”

Agn
elli continued: “And now what is the next environment that we are going to face: deflation or inflation? This is a question mark. It’s worth a lot of money, the answer of this question. I don’t know, maybe we are going to have inflation. So that’s why we are calm. We are not in a hurry.”

The markets seemed to like Agnelli’s message. Vale’s ADRs in New York have rebounded strongly to US$14.54 at presstime, up from a multi-year low of US$9.99 on Oct. 24, just prior to the shutdown announcement. Still, it’s a far cry from the ADRs’ all-time high of US$44.15, achieved in mid-2008.

The company’s market capitalization is now US$77 billion, off from US$233 billion at its peak.

“What I can tell you is that a major disaster, much bigger than everybody here can think, is already in the Vale stock price today,” Agnelli said, noting the company is prepared to buy back stock on the open market.

“I am confident we will be out of this crisis stronger,” he concluded. “And we came in very strong.”