RIO DE JANEIRO, Feb 10, 2012 (Dow Jones)--Brazil's Vale SA (VALE, VALE5.BR), the world's largest iron ore mining company and a major base metals producer, should report a decline in profits for a second consecutive quarter on Wednesday as iron ore prices dipped late last year and nickel and copper prices remained depressed on slowing demand in China after credit restrictions.
Vale may report fourth-quarter net profit of $4.7 billion, according to the average forecast of nine analysts polled by Dow Jones Newswires. That would be 20% below the $5.917 billion of fourth quarter 2010, when demand surged as manufacturing industries globally bounced back after the 2009 financial crisis. Net revenue may slip to $14.1 billion from $15.2 billion in the year-earlier period.
Vale may feel the impact in the fourth quarter of a switch in iron ore price mechanisms. Introduced mainly to suit Chinese steelmakers seeking to cut costs, the new system bases contracts on current quarterly or monthly spot market price averages, instead of on prices in a previous quarter. The company has said that prices fell around 20% from the third quarter.
"We expect [results] to be bruised by lower iron ore prices," said Edmo Chagas, an analyst at Banco BTG Pactual, in a research report. "We believe cost issues should linger and we see room for some disappointment."
It's not the first time that Vale has bowed to pressure from Chinese steelmakers as it seeks to hold its own against Australian competitors which has used their geographic proximity to capture a bigger stake in the market which consumes more than half the world's iron ore output. In 2009, a 40-year old annual iron ore contract pricing system which gave more predictability to mining companies fell apart because Chinese mills preferred to buy on the cheaper spot market.
Nor did Vale manage to offset lower prices by higher volumes in the fourth quarter, according to the analysts. Crude steel output in China, the world's biggest producing nation, fell 10% from the third quarter, according to Brussels-based World Steel Association, after credit tightening led to an abrupt fall in demand for steel from the local property market.
Barclays Capital notes there's little hope of improvement volume-wise in the first quarter as China's steelmaking levels still remain depressed in February, while iron ore inventories at major Chinese ports continue near record highs. Vale also lost iron ore shipments in January due to exceptionally heavy rain in southeast Brazil which forced it to declare force majeure on some contracts for a 13-day period.
Pactual and Barclays both foresee Vale could post impairment charges on Companhia Siderurgica do Atlantico--a cost-heavy joint-venture Brazil steelworks project with Germany's ThyssenKrupp AG (TYEKY, TKA.XE) which contributed to more than EUR2 billion in write-offs to the German steelmaker in 2011.
Vale has missed all quarterly consensus estimates for its results in 2011 on market and price fluctuations, growing costs, reserves depletion which is inhibiting production growth and a continuing battle with Brazil's federal government over unpaid tax bills, according to analysts surveyed. These factors have depressed Vale's share performance since August and will continue to make 2012 a challenging year, they said.