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Vale Says Steel Demand to 'Heat Up' as Profit Surges (Update2)
Aug 2, 2010 09:13CST

July 30 (Bloomberg) -- Vale SA, the world's largest iron- ore producer, sees continued "strong" demand for the steelmaking raw material this year as Chinese economic growth accelerates. The stock rose to an almost two-month high.

"In addition to an expected Chinese recovery, it's likely that demand for steel in the rest of the world will heat up" in the last three months of the year, Vale said yesterday in its quarterly earnings report.

The Rio de Janeiro-based company reported a fourfold increase in its second-quarter profit after iron-ore prices surged from a year earlier. Net income gained to $3.7 billion, or 70 cents a share, from $790 million, or 15 cents, in the year-earlier period. The company was expected to post per-share profit of 70 cents on an adjusted basis, the average of 13 analysts in a Bloomberg survey.

Speculation that China will ease measures to curb growth has sent Vale shares toward their biggest monthly gain in 15 months in July. Vale is producing iron ore at full capacity and buying mines outside Brazil as Chinese-led demand helped spot prices double in the second quarter from a year earlier.

'Sustainable Pace'

"China continues to grow at high rates," Vale Chief Financial Officer Guilherme Cavalcanti said on a conference call with analysts today. Although growth has slowed in the Asian nation, "we believe it is a more sustainable pace," he said.

Vale rose 1 percent to 42.95 reais at 12:37 p.m. in Sao Paulo trading, after earlier rising to 43.09, the highest since June 2. The stock has rallied 13 percent this month, putting it on track for its biggest monthly gain since April 2009.

Vale moved to a new system of pricing iron ore quarterly, allowing it to benefit more quickly from price surges compared with previous contracts that were signed on an annual basis. Rebounding industrial expansion following the global credit crunch boosted demand for minerals and metals and resulted "in the strongest price surge during a recovery after the past five global recessions," Vale said.

"The positive price variation of iron ore is the main factor" for Vale's profit gain, Felipe Reis, a Banco Santander analyst who rates the stock a "buy," said in a note to clients before results were released. Santander sees "good prospects for the remaining quarters of 2010, including the new round of iron-ore price increases yet to be fully reflected in Vale's operating performance."

Global Shipments

Global shipments of iron ore will advance 6 percent to a record 961 million tons this year, according to estimates by Clarkson Plc, the world's biggest shipbroker.

While last month's Chinese steel output was the smallest since February, the nation still accounted for 45 percent of global supply. China is starting to rebuild stockpiles, while the U.S. and Europe will likely boost inventories in the fourth quarter, Claudio Alves, Vale's director for iron-ore sales in the Americas, said July 20 at an event in Rio de Janeiro.

Vale said yesterday that it sold iron ore at $91.93 a ton in the second quarter, compared with $47.82 a ton in the year- earlier period. The company sold about 69.6 million tons of ore and pellets in the quarter, a 29 percent gain from a year ago.

Shipping Delays

Realized per-ton iron-ore prices were less than some analysts had expected, mainly because Vale sold about 10 million tons of ore at lower prices in the second quarter because of delivery delays, said Jose Carlos Martins, executive director of ferrous minerals.

The iron-ore was sold at first-quarter prices because rains and other factors prevented the company from delivering it on time before April, Martins said today on the conference call. Domestic customers also bought ore for a lower price because it's cheaper to transport, he said.

Additional exports were delayed into the third quarter, and the company expects to start the fourth quarter without any "carryover" of shipments, Martins said.

Second-quarter sales almost doubled to $9.9 billion, from $5.1 billion a year ago, Vale said. Revenue from nickel fell 10 percent to $820 million in the quarter amid strikes at units in Canada.

Vale workers at two Ontario plants voted to end a yearlong strike earlier this month, ending the longest industrial dispute in the company's 67-year history. Vale said on the conference call today that it expects the Canadian operations to return to full capacity by the end of September.

The earnings results, released yesterday after the close of regular trading in Sao Paulo, were based on generally accepted accounting principles in the U.S.

Building Fleet

The miner is building its own fleet of ships to send ore from Brazil to China. The company is also building distribution centers in the Middle East and Asia to challenge BHP Billiton Ltd. and Rio Tinto Group, whose iron-ore mines in Australia are closer to China. Vale's market share in the seaborne market dropped to about 25 percent in 2009, compared with 30 percent a year earlier, because of reduced demand in Europe and Brazil.

The company said yesterday in a separate statement that it plans to buy Brazilian copper producer Paranapanema SA for 2.01 billion reais as it seeks to become one of the world's top producers of the metal.

Vale said April 30 that it agreed to pay $2.5 billion for a 51 percent stake in BSG Resources (Guinea) Ltd. to gain access to iron-ore deposits in the West African nation. On May 2, the company said it is selling aluminum assets to Norsk Hydro ASA in a $4.9 billion deal because the business had limited growth potential. As part of the transaction, Vale will become the Oslo-based company's second-largest shareholder.

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