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Vale Reports Weak 1Q15: Are Lower Iron Ore Prices to Blame? (Part 3 of 5) (Continued from Part 2) Weak iron ore price realization
Vale S.A.’s (VALE) iron ore prices declined an average of $12 per ton quarter-over-quarter in 1Q15. Iron ore price realization is different, however, from spot prices due to lagged, contract, and carryover prices. To know more about Vale S.A.’s (VALE) pricing systems, read Vale SA: The iron ore giant deconstructed.
For Vale, realized iron ore prices in 1Q15 were negatively impacted by $7 per ton due to its provisional price mechanism and a decline in spot prices. The company realized iron ore prices of $46 per ton in 1Q15 compared to $61.60 per ton in 4Q14. This led to a larger-than-expected decline in the profitability of its iron ore segment. However, the company did get some support on the costs front.
Iron ore costs decline
In 1Q15, Vale’s iron ore FOB (free on board) costs declined to $19.80 per ton, including royalties, from $23.20 per ton in 4Q14. This is mainly due to the depreciation of the Brazilian real (or BRL) of 12.8%, from 2.54 to 2.87 BRL–US dollar, and ongoing cost reduction efforts.
Vale commented that it would like to further reduce costs to $17 per ton in 2015. The company’s break-even price was close to $45 per ton in 1Q15. With the cost-cutting initiatives, Vale expects the break-even point to move close to $40 per ton and perhaps even lower if the BRL continues to depreciate.
Freight costs decline
Vale’s freight costs also declined in 1Q15 to $17.20 per ton, or $19.50 including bunker oil hedge. This compares to $21.70 per ton in 4Q14 and $23.90 per ton in 1Q14. The decline is mainly due to lower bunker oil prices and lower spot freight rates.
Other iron ore producers also benefited from depreciating local currencies and lower freight costs. These companies include BHP Billiton (BHP), Rio Tinto (RIO), and the Australian segment of Cliffs Natural Resources (CLF). CLF forms 4.0% of the SPDR S&P Metals and Mining ETF (XME).
Continue to Part 4 Browse this series on Market Realist:
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Vale
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EXPLORATION STAGE |
CODE : VALE3.SA |
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ProfileMarket IndicatorsVALUE : Projects & res.Press releasesAnnual reportRISK : Asset profileContact Cpy |
Vale is a producing company based in Brazil. Its main exploration property is GALIURO in USA. Vale is listed in Brazil and in France. Its market capitalisation is BRL 326.3 billions as of today (US$ 150.8 billions, € 140.9 billions). Its stock quote reached its lowest recent point on February 19, 2016 at BRL 10.51, and its highest recent level on August 27, 2021 at BRL 99.80. Vale has 5 244 319 744 shares outstanding. |