Monsters of Rock: Vale thinks global steel production will grow in 2022 to support iron ore
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Brazil’s Vale, the world’s second largest iron ore exporter in 2021 behind Rio Tinto, says it expects global steel production to grow in 2022 despite demand concerns in China.
Global steel production totalled 1.92Bt last year, up 3.6%, according to the World Steel Association with a large rise in Chinese output in the first half dragged down by a big decline in the second half of 2021.
World steel production in January fell 6.1% year on year to 155Mt as China kept its mills at low capacity ahead of the Beijing Winter Olympics and Paralympics.
New York listed Vale is the main competitor to the ASX listed BHP (ASX:BHP) and Rio Tinto (ASX:RIO) and is considered by many analysts to be the most likely source of major new supply in the global iron ore market.
Vale, which plans to produce 320-335Mt in 2022 and hit a capacity of 370Mtpa by the end of the year, believes steel demand will remain strong in 2022 as economies continue to open up post-pandemic.
“Our outlook for iron ore remains positive, given the recovery of the global economy driven by the progress in global vaccination and the less-harmful effects of new variants, leading to further opening of economies,” Vale said in a financial report today.
“We believe world steel production will grow slightly in 2022 as global economy is strengthened by the reduction in supply chain bottlenecks, continued pent-up demand in past years and rising business and consumer confidence.
“Rising inflation and deceleration in China are drivers that may counterbalance and increase the risk to the recovery momentum.”
Vale has the highest average iron ore grade of all the major miners, with its high quality Carajas fines the basis for the premium 65% fines index, which is at historically high premiums to benchmark 62% mid-grade fines.
“In the long term, the transition to a greener economy will require the consumption of high-quality iron ore products to ensure emissions reduction.”
Vale, which saw its production levels slip in 2019 after a tragic tailings dam collapse at Brumadinho, is still paying for the disaster which killed 270 people.
It reported proforma EBITDA of US$6.959 billion in the December quarter, US$150m down on the third quarter as its iron ore prices fell US$19.9/t (though Vale’s higher grades shielded it from the US$53.3/t QoQ drop in the benchmark 62% iron ore price which hurt lower grade producers like Fortescue Metals Group (ASX:FMG) and Mineral Resources (ASX:MIN).)
Vale also enjoyed an increase in sales volumes as it rushed to meet the lower end of its 2021 guidance, with iron ore fines and pellet sales increasing by 23.3%.
More than US$2b of payments largely linked to the Brumadinho reparations saw its EBITDA fall to US$4.73b.
Vale, which also owns the Voisey’s Bay nickel mine in Canada along with copper and manganese businesses, remains positive on the long-term outlook for base metals including nickel due to EV growth.
RBC Capital Markets London analyst Tyler Broda said Vale remained preferential to Australian iron ore miners due to its larger growth profile, but is cautious on the sector warning of a “air pocket” of demand from quarter 2 onwards when most analysts expect Chinese steel makers to ramp up production.
Vale is also a potential beneficiary if China succeeds in its plan to set up a single purchasing platform for iron ore, which theoretically could improve its control over prices and become less reliant on Australian iron ore, currently 60% of its imports.
Markets are heartless bastards and they have moved swiftly from the denial phase of grief over Russia’s invasion of Ukraine to acceptance if today’s ho-hum performance is anything to go by (though it was supported by an astonishing 32.5% rise for Afterpay owner Block Inc. (ASX:SQ2)).
The ASX 200 was up 0.1% with materials, containing the major mining stocks, down only 0.06% and the iron ore miners largely maintaining this status quo.
Gold producers erased recent gains, but Lynas Rare Earths (ASX:LYC) powered up by 6.93% after announcing a quadrupling in first half profit on barnstorming rare earths prices.