Vale: Keep an Eye on 2009 Iron Ore Prices

In the last few months, the outlook for commodity stocks has been quite unclear since most commodities have been falling due to the economic environment. Vale do Rio Doce (RIO) is no exception since most metals' prices are facing a very difficult moment as worldwide demand shrinks.

However, there is some interesting news to be considered. In the beginning of 2009, new prices for long-term contracts of iron ore will be negotiated (it seems that this year BHP Billiton (BHP) will lead the negotiation). Until recently, there was an expectation that iron ore prices would be cut as much as 30%. However, in the last weeks the Indian spot iron ore prices recovered to US$80.50 per ton, a very good price if we consider that the average sale price of RIO's iron ore in the third quarter 2008 was US$80.19.

According to our model, the current price of RIO -- around US$11.60 -- incorporates a price cut for iron ore for 2009 of 30% and a reduction on the company's production of 20%. RIO already announced a decrease in its production of 10% and we expect further cuts.

It is too soon to have a more positive outlook on the stock, but it is something to keep in mind: if iron ore prices were to be cut by no more than 15% in 2009, the current price of RIO would be attractive again. We are keeping unchanged our Hold rec on RIO, but we are keeping our eyes open ...

Comments

[Kunst:]

As the pendulum swings, excesses can occur in both directions. After a time of extreme optimism, we are now in the depths of economic despair. This too may prove to be overdone. The one thing you can be sure of about 2009 is that it will contain many surprises that will only be obvious in retrospect, just like 2008.

Jan 03 02:27 AM