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Vale sees strong demand for metals and minerals

Vale sees strong demand for metals and minerals

By Dorothy Kosich, Mineweb.com

Vale Wednesday reported a 42.9% increase in iron ore production, a 237% increase in pellet output, a 252.5% increase in manganese ore production, a 49.8% decrease in nickel output, a 54.2% drop in copper production, and substantial decreases in the nickel by-products of cobalt, gold, silver and PGMs during the first quarter of this year.

Meanwhile, Vale officials predicted "a very promising scenario for the metals and mining industry in the short as well as in the long term."

In its business outlook, Vale said, "The global economic recovery set in motion a substantial expansion in steel consumption. ...Reflecting the strong demand pressure, the market for iron ore has been very tight, with rising spot prices and an increasing stock/consumption ratio in China, despite the price stimulus to local high cost producers."

"There is a very limited additional supply expected to come on stream this year and in 2011," according to Vale. The company said it has returned to full capacity operation in both iron ore mining and pellet production, as well as added an additional 20 Mtpy high-quality capacity at Carajas. "However, it will have a minimal impact on Vale's supply of iron ore in 2010, as it will be chiefly dedicated to offsetting some losses in our production capacity."

Iron ore production was up 42.9% during the first quarter as Vale reported 69,059 Mt, while pellet production soared 263.7% to 10,492 Mt during the same period.

"Going forward, we expect the iron ore market to remain tight for an extended period of time," Vale predicted.

In its analysis, Vale noted that nickel inventories have been declining and prices increasing since early February. Meanwhile, Vale said, "We have been taking steps to resume production at the Sudbury and Voisey Bay operations, both shut down due to the labor strike since 3Q09. As already announced, up to now we have managed to partially re-start operations in both sites."

Nevertheless, Vale's nickel production dropped by nearly half in the first quarter of this year to 33,000 metric tons, compared to 65,000 metric tons of production during the first-quarter 2009. The Voisey Bay site is operating on a two-week on, two-week off basis. Production has resumed at the Voisey Bay Ovid mine and mill, which supplies nickel concentrates to Vale operations in Thompson and Sudbury.

Nickel by-products pertaining to cobalt, platinum, palladium, gold and silver have also been hard-hit by the strike at Sudbury operations. Cobalt production dropped 81.8%, platinum by 97.1%, palladium down 93.6%, gold off 81.3% and silver down 80.3%.

Vale's copper production also dropped 54.2% during the first quarter to 34,000 t, compared to 73,000 t during the same quarter of 2009.

The company's metallurgical coal production increased 40.3% to 717,000 t of met coal during the first quarter of this year, while thermal coal output jumped 59.8% to 701,000 t.

Meanwhile, Vale also discussed its decision to move existing iron ore contracts to index-based prices.  In its analysis, Vale noted that a new global growth pattern produced "a major change in the dynamics of the iron ore market."

"The new system, as agreed with our clients, smoothes the natural daily spot price volatility as it establishes a quarterly iron ore price based on a three-month average of price indices for the period ending one month before the onset of the new quarter," the company explained. "While retaining flexibility, the system allows steel companies to be known beforehand the price to be paid in the following quarter, thus facilitating cost control and inventory management."

"Consistent with the requirements of a modern economy, the price system proposed by Vale minimizes the cost of price discovery, eliminating one important source of inefficiency."

"Our proposal has several major advantages over the annual price negotiations," Vale asserted. "It produces significant efficiency gains, saving costs and providing the right stimulus to investment, brings flexibility with cost predictability, and enhances transparency."

"We strongly believe that it will be mutually beneficial to steel and mining companies, boosting their contribution to global economic and social prosperity," Vale advised.

FINANCIALS

The implementation of the new iron ore pricing system will be reflected in Vale's second-quarter 2010 results.

Vale reported net earnings of US$1.6 billion or 30-cents per share during the first-quarter 2010, up 17.7% from the $1.36 billion or 26-cents in net earnings reported during the first quarter of 2009.

As of March 21, 2010, total debt was reported to be $23.57 billion, up from $22.88 billion as of December 31, 2009.

The company has entered into agreements to acquire fertilizer assets in Brazil and iron ore assets in West Africa, involving a total of US$8.2 billion, which will be disbursed from the second-quarter 2010 onward.

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