Brazil Vale Profits Seen Rising Fourfold On Market Rebound

27th Jul 2010 17:58

By Diana Kinch Of DOW JONES NEWSWIRES RIO DE JANEIRO (Dow Jones)--Net profits at Brazil's Vale SA (VALE, VALE5.BR) could soar more than fourfold in second-quarter 2010, with the world's biggest iron ore miner benefitting from price hikes of over 100% as steelmakers worldwide emerge from crisis. Profits may leap to $3.56 billion in the earnings report due Thursday evening, according to the average estimate of six analysts surveyed by Dow Jones Newswires. That would be more than four times the $790 million in profits from second-quarter 2009. According to SLW brokerage analyst Pedro Galdi, second-quarter 2009 was the deepest point of the global economic crisis, which led steelmakers in many nations to halve output while ore contract prices fell up to 33%. But this year has seen a stunning turnaround. Vale, with rivals BHP Billiton PLC (BHP) and Rio Tinto PLC (RTP), negotiated price hikes of up to 120% for iron ore from April 1, valid for three months, after miners and steelmakers adopted a quarterly, index-linked pricing mechanism. This replaced the 40 year-old annual benchmark system, which fell apart after steelmakers in China, who take more than 60% of the world's traded iron ore, refused to settle 2009 contracts after seven straight years of increases, preferring to buy at cheaper spot prices. Steelmakers globally agreed to price rises this year to secure ore supplies as they relit blast furnaces amid a market rebound. "Parameters changed radically between second quarters 2009 and 2010," said Felipe Reis, an analyst with Banco Santander. "These quarters moved in opposite directions; second-quarter 2009 was really weak." Second-quarter revenues would have been even better if Vale hadn't suffered operational problems in the train and port system serving its giant Carajas mine in northern Brazil, Itau Securities' analyst Alexandre Miguel said. Analysts surveyed, from Santander, Itau, Barclays, Canaccord, Credit Suisse and Bank of America Merrill Lynch, foresee, on average, Vale net sales of $9.93 billion in the second quarter, double the $4.95 billion of a year earlier. "Iron-ore sales volumes [pellets and fines] are expected to remain flat, quarter on quarter, at 66 million tons," Miguel said. "We believe there's been an operating problem with the trains since the first quarter. Early in the second quarter, there were also heavy rains." Nickel sales volumes will fall to about 46,000 tons from 69,000 tons a year ago because of a strike at Vale's Canadian mines that ended only this month, Galdi said. But the rise in average nickel prices, to $21,384 a ton from $14,076 in second-quarter 2009, may offset the fall in volumes, he said. John Johnson, chief executive of CRU Group's research unit in China, last week forecast tight iron ore markets as China may double imports by 2020 to fuel steelmaking as its urban centers grow. This will support iron ore prices in the long term. However, in the short term, market fluctuations will be reflected in Vale's revenue figures, which could grow in the third quarter but drop off in the fourth. "Third-quarter 2010 should be better still for Vale," said Itau's Miguel. With the new quarterly iron-ore pricing system, based on average spot prices in the previous quarter, contract prices rose a further 35% in the third quarter. Vale's shipments of both iron ore and nickel should also grow, he said. "We're forecasting peak Brazilian iron ore fines and pellets prices in third-quarter 2010, at 2.6 times 2009 contract prices," said Canaccord analyst Gary Lampard. "We're forecasting a 16% decline in iron ore and pellet prices for fourth quarter 2010 and a further 10% decline in 2011." For Barclays Capital analysts, Vale's second-quarter report is the first major test of the quarterly pricing mechanism, but shouldn't be seen as a "catalyst" since current spot iron prices of $123, down from $185 earlier this year, "imply a downside to realized prices going forward." -By Diana Kinch, Dow Jones Newswires; 55-21-2586-6086; [email protected] (END) Dow Jones Newswires July 27, 2010 12:58 ET (16:58 GMT)