Vale Says China Proving Pessimists Wrong on Steel Output

Aug. 8 (Bloomberg) — Vale SA, the biggest iron-ore producer, forecasts the steel-making ingredient’s main buyer China will increase steel output about 10 percent this year.

China probably will produce 780 million metric tons of steel this year compared with 683 million tons two years ago, underpinning a favorable view on the world’s largest emerging market, Chief Executive Officer Murilo Ferreira said today.

“China has once more proved the pessimists wrong,” Ferreira said during a conference call to discuss quarterly earnings. “Our view related to China continues positive.”

The shares of Vale and major rivals BHP Billiton Plc and Rio Tinto Plc rallied today after Chinese imports climbed to the highest in 14 months and an iron-ore index reached a three-month high. The Rio de Janeiro-based company’s shares are down 27 percent this year after a slowdown in commodities demand and rising costs crimped miners’ earnings.

After tumbling 15 percent in the second quarter, iron-ore prices entered a bull market on July 26 after China replenished inventories and boosted steel output. In a presentation on its website today, Vale said a sharp drop in steel inventories in recent months opens the door to greater consumption growth.

Vale said late yesterday that second-quarter adjusted earnings before interest, tax, depreciation, and amortization, or Ebitda, fell to $4.96 billion from $5.5 billion a year ago, beating the $4.79 billion average estimate. Per-share earnings excluding items beat the average estimate by 14 percent, according to data compile by Bloomberg.

Shares Gain

“The beat was driven by yet another quarter of solid cost performance, which more than offset weaker than expected iron- ore shipments,” JPMorgan Chase & Co. analysts including Rodolfo Angele wrote in a research note. “The shares are not pricing in the implementation of changes by management, more specifically on cost reduction and growth.”

Vale shares gained 3 percent to 29.93 reais at the close of trading in Sao Paulo, its highest since June 4. Iron-ore prices rose to $133.10 a ton yesterday, according to data from The Steel Index Ltd. The price has rebounded from $110.40 on May 31. Prices traded at an average of $125.60 a ton in the second quarter, 9.9 percent less than last year.

Chinese steel production probably will grow between 3 percent and 7 percent in coming years, Vale Executive Director for Ferrous and Strategy Jose Carlos Martins, said on today’s call. Iron-ore prices are unlikely to fall below the $100 to $110 per ton level on a sustained basis, he said.

Real Weakness

“I don’t lose my sleep over China,” he said.

Net income fell to $424 million, or 8 cents a share, from $2.64 billion, or 52 cents, in the second quarter last year, after a weaker real generated losses on its $30 billion debt, Vale said yesterday. Profit was expected at 24 cents a share, the average of three analysts’ estimates compiled by Bloomberg. The real was the worst-performing emerging market currency in the quarter after losing 9.4 percent against the dollar.

“The lower real impacts Vale’s indebtedness in dollars,” Rafael Weber, who helps manage about 5.4 billion reais at Geracao Futuro Corretora, said by telephone from Porto Alegre, Brazil. “Operationally, the negative highlights were the lower iron-ore volumes and margins a bit below what I was expecting.”

Vale produced 73.2 million metric tons of iron ore in the quarter compared with 80.5 million tons a year earlier after rains at Carajas, the world’s largest iron-ore complex, and permit delays, the company said. Citigroup Inc. had estimated the company would produce 81 million tons.

Currency Losses

The company booked foreign exchange and monetary losses of $1.97 billion compared with $1.77 billion a year earlier, while posting currency swap losses of $814 million.

Net sales fell 12 percent to $11 billion in the period after Vale sold iron ore at an average $99.21 a metric ton, 12 percent less than a year earlier. That was above the $95.30 per ton average of four estimates compiled by Bloomberg.

“This reduced net income doesn’t mean that the company is in a worse situation, it’s just an accounting effect,” Chief Financial Officer Luciano Siani said in a video posted on the company’s website with the earnings report. “This doesn’t increase the size of our debt when measured in reais.”

Total debt as of June 30 declined to $29.9 billion from $30.2 billion in the previous quarter.

Metal Output

Vale, the world’s biggest nickel producer after Moscow- based OAO GMK Norilsk Nickel, said output of the metal gained 6.6 percent to 65,000 metric tons, while shipments rose 3.2 percent. Copper production advanced 30 percent to a record 91,300 metric tons and total coal output increased to 2.4 million tons, also a record. Potash production fell 12 percent.

Iron-ore production for the first half of the year was 140.8 million tons, 6.5 percent below 2012, and Carajas missed its output target for the period by 4 million tons. Operating performance at the mine has recovered in July and Carajas is expected to meet its 67 million ton target for the second part of 2013, it said.

“With the dry season already under way, operating performance in Carajas is improving and we are still aiming to produce close to the budgeted volume for 2013,” Vale said.

Production of the steel-making ingredient was the “main negative” in Vale’s results, which were “mostly positive,” Citigroup analysts Alexander Hacking and Thiago Ojea said.

“We expect Vale to trade slightly higher on these results,” the analysts wrote in a note to clients dated yesterday. “Subsequent Brazilian real depreciation will help further on operational expenditures and capital expenditures in the coming quarters.”