Expensive pricing at the Brazilian iron-ore miner may lose it market share in China, as buyers increase purchases from cheaper rivals like BHP
Bloomberg in Rio de Janeiro and Sao Paulo 25 October 2011
Vale, the world’s largest iron-ore producer, is underperforming rival BHP Billiton in the bond market on concern the Brazilian miner may lose market share in China, the biggest buyer of the steel-making material.
Vale’s US dollar bonds due in 2019 yield 150 basis points, or 1.5 percentage points, more than similar-maturity debt sold by BHP, up from a more than six-week low of 122 on October 17. While yields on Vale’s securities were little changed last week at 4.76 per cent, those on BHP’s bonds fell 10 basis points to 3.26 per cent.
Speculation is growing that Chinese steelmakers will step up iron-ore purchases from BHP, the world’s largest mining company, while paring those from Vale after it said it will maintain a pricing formula that makes its products more expensive. Vale’s prices are based on a three-month average, while those of BHP are predicated on monthly contracts that more closely reflect the metal’s decline. The price of ore fell to a one-year low of US$142.60 a tonne on October 21.
BHP “has a better pricing model over the Vale model,” said Vinicius Pasquarelli, an emerging-market debt trader at Tradition Asiel Securities. “In terms of credit, BHP should be better over the next four to six months.”
Vale said last week that the quarterly pricing system is “the most appropriate methodology” for the iron-ore market at the moment. While the company may consider changing the pricing on some contracts for the steel-making raw material, it is currently maintaining its quarterly pricing formula and has “no desire” to sell on the spot market, CEO Murilo Ferreira said separately last week.
“If anyone wants to buy under different conditions, we can discuss it,” Ferreira said. “We adjust according to the market conditions at the moment.”
Vale’s iron-ore contracts are based on a three-month average of price indexes for the period ending a month before the onset of the new quarter. The firm, together with BHP and Rio Tinto, last year abandoned a 40-year custom of setting prices annually in favour of quarterly contracts. Vale sold its iron-ore at an average of US$145.30 per tonne after adjusting for freight costs during the second quarter, the firm said in July.
Vale and BHP both declined to comment.
Iron-ore prices for immediate delivery have fallen about 20 per cent in the past six weeks on concern the expansion in China is slowing and Europe’s debt crisis is worsening. The price of ore with 62 per cent iron content delivered to the Chinese port of Tianjin fell for a 10th day, declining 2.2 per cent on October 21.
BHP is now selling the “vast majority” of its iron ore at monthly prices, CEO Marius Kloppers said on October 20. The company continues to push for shorter-term pricing for all its products, he said.
Vale is likely to reduce its prices if the company begins to lose customers, said George Strickland, who helps oversee about US$4 billion in fixed-income assets at Thornburg Investment Management.
“I would assume that if it really started to hurt their business they’d probably go back to monthly pricing to compete,” Strickland said. “It just shows that when iron-ore demand slows down, the power of the fulcrum shifts back to the buyers and away from the suppliers. But they still have a very strong balance sheet and still are a global low-cost producer, so I wouldn’t be overly concerned about the credit.”
Vale, the world’s second-largest mining company by market value, is forecast to post a record US$26.5 billion in adjusted net income this year, according to analyst estimates. The company may report on October 26 third-quarter per-share profit of US$1.15 on an adjusted basis, the average of 11 analyst estimates.
Vale is more vulnerable than BHP to the slowdown in China and Europe because it is less diversified geographically and more dependent on iron-ore sales, said Ernie Lalonde, senior vice-president of mining at Toronto-based credit rating firm DBRS.
Vale sold about 42 per cent of its iron ore and pellets to China in the second quarter, while Europe accounted for 20 per cent of the total as the firm’s second-biggest regional market. The raw material accounts for about 72 per cent of Vale’s sales, compared with 28 per cent for BHP.
Vale will come under pressure from its customers to change its pricing system, Lalonde said.
“We are back to the situation where not only are we going to be discussing what the pricing is for the next quarter but the companies are going to be back to discuss the price mechanics,” Lalonde said. “The overall concept of shorter-term pricing in those markets was being promoted by BHP Billiton and the question now is that if this gap that has developed forces them to even shorter prices of some sort.”
2 comments:
Chinese steelmakers could shun Vale
Expensive pricing at the Brazilian iron-ore miner may lose it market share in China, as buyers increase purchases from cheaper rivals like BHP
Bloomberg in Rio de Janeiro and Sao Paulo
25 October 2011
Vale, the world’s largest iron-ore producer, is underperforming rival BHP Billiton in the bond market on concern the Brazilian miner may lose market share in China, the biggest buyer of the steel-making material.
Vale’s US dollar bonds due in 2019 yield 150 basis points, or 1.5 percentage points, more than similar-maturity debt sold by BHP, up from a more than six-week low of 122 on October 17. While yields on Vale’s securities were little changed last week at 4.76 per cent, those on BHP’s bonds fell 10 basis points to 3.26 per cent.
Speculation is growing that Chinese steelmakers will step up iron-ore purchases from BHP, the world’s largest mining company, while paring those from Vale after it said it will maintain a pricing formula that makes its products more expensive. Vale’s prices are based on a three-month average, while those of BHP are predicated on monthly contracts that more closely reflect the metal’s decline. The price of ore fell to a one-year low of US$142.60 a tonne on October 21.
BHP “has a better pricing model over the Vale model,” said Vinicius Pasquarelli, an emerging-market debt trader at Tradition Asiel Securities. “In terms of credit, BHP should be better over the next four to six months.”
Vale said last week that the quarterly pricing system is “the most appropriate methodology” for the iron-ore market at the moment. While the company may consider changing the pricing on some contracts for the steel-making raw material, it is currently maintaining its quarterly pricing formula and has “no desire” to sell on the spot market, CEO Murilo Ferreira said separately last week.
“If anyone wants to buy under different conditions, we can discuss it,” Ferreira said. “We adjust according to the market conditions at the moment.”
Vale’s iron-ore contracts are based on a three-month average of price indexes for the period ending a month before the onset of the new quarter. The firm, together with BHP and Rio Tinto, last year abandoned a 40-year custom of setting prices annually in favour of quarterly contracts. Vale sold its iron-ore at an average of US$145.30 per tonne after adjusting for freight costs during the second quarter, the firm said in July.
Vale and BHP both declined to comment.
Iron-ore prices for immediate delivery have fallen about 20 per cent in the past six weeks on concern the expansion in China is slowing and Europe’s debt crisis is worsening. The price of ore with 62 per cent iron content delivered to the Chinese port of Tianjin fell for a 10th day, declining 2.2 per cent on October 21.
BHP is now selling the “vast majority” of its iron ore at monthly prices, CEO Marius Kloppers said on October 20. The company continues to push for shorter-term pricing for all its products, he said.
Vale is likely to reduce its prices if the company begins to lose customers, said George Strickland, who helps oversee about US$4 billion in fixed-income assets at Thornburg Investment Management.
“I would assume that if it really started to hurt their business they’d probably go back to monthly pricing to compete,” Strickland said. “It just shows that when iron-ore demand slows down, the power of the fulcrum shifts back to the buyers and away from the suppliers. But they still have a very strong balance sheet and still are a global low-cost producer, so I wouldn’t be overly concerned about the credit.”
Vale, the world’s second-largest mining company by market value, is forecast to post a record US$26.5 billion in adjusted net income this year, according to analyst estimates. The company may report on October 26 third-quarter per-share profit of US$1.15 on an adjusted basis, the average of 11 analyst estimates.
Vale is more vulnerable than BHP to the slowdown in China and Europe because it is less diversified geographically and more dependent on iron-ore sales, said Ernie Lalonde, senior vice-president of mining at Toronto-based credit rating firm DBRS.
Vale sold about 42 per cent of its iron ore and pellets to China in the second quarter, while Europe accounted for 20 per cent of the total as the firm’s second-biggest regional market. The raw material accounts for about 72 per cent of Vale’s sales, compared with 28 per cent for BHP.
Vale will come under pressure from its customers to change its pricing system, Lalonde said.
“We are back to the situation where not only are we going to be discussing what the pricing is for the next quarter but the companies are going to be back to discuss the price mechanics,” Lalonde said. “The overall concept of shorter-term pricing in those markets was being promoted by BHP Billiton and the question now is that if this gap that has developed forces them to even shorter prices of some sort.”
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