Growth of miners is heavily reliant on China's economy and the iron ore price. Lower iron ore price along with lower economic growth in China has hurt all the major mining companies. China's economy is showing signs of recovery which is good news for Vale S.A. (VALE), the giant iron ore producer and exporter in Brazil. China is the largest iron ore customer of Vale, and accounts for 50% of the company's exports.
Despite the slow economy, Chinese demand for iron ore was strong. The country has a growing need for steel and has good relations with Brazil. Brazil, China and Australia are the world's chief producers of iron ore with Brazil and Australia being the major exporters. China imports 25% of its total iron ore from Brazil. In August, China imported 13.6 million tons of iron ore from Brazil, a record for the time of year. Iron ore is the key material for steel production. China consumes a third of the world's steel. Vale forecasts steel output in China will grow 10% this year. China, the world's largest steelmaker, will boost demand for iron ore by producing 780 million metric tons of steel this year compared with 683 million tons two years ago. China is the second largest producer of iron ore. But the country's iron ore resources are of low grade with high cost of extraction, due to which it will always be dependent on imports from other countries.
In the mining business, Vale, Rio Tinto (RIO) and BHP Billiton (BHP) are the main players and control some 70% of seaborne trade. All the companies are going ahead with their expansion plans almost simultaneously. Expansion by these miners can increase the iron ore output by 100 million tons in 2013. Increased iron ore production may lead to surplus capacity in the future. Vale expects capacity could exceed demand between 5% and 6% by 2018.
By 2017, Vale plans to boost its iron ore production by 31%. Rio also plans to increase its iron ore production in the coming years. Rio opened new facilities in the Pilbara region to increase annual iron ore production from 220 million tons to 290 million tons, and the expansion from 290 million tons to 360 million tons in the same region is in-progress.
BHP Billiton, the world's third-biggest exporter of iron, is also lifting its iron ore production capacity. BHP expects that China's rapid industrialization will lift demand for iron ore. BHP anticipates to produce 212 million metric tons of iron ore from its Pilbara operations in this financial year ending June 30, 2014, compared with 187 million tons it produced last financial year.
Vale has increased focus on cutting its costs to maintain margins. In the first half of 2013, the company managed to reduce expenses by $1.6 billion. Credit Suisse estimated that Vale will reduce its cost by a further $800 million in the second half of 2013, and by $400 million in 2014. The company is also selling some of its assets to reduce its operating cost which will help to boost profit margins. Vale is selling assets and focusing on its most profitable business - iron-ore - which accounts for more than 90% of its total profit. The company generates approximately 70% of its total revenue from iron ore. Vale intends to sell more assets by the end of this year.
Vale is well positioned to dominate. The company is largely dependent on the Chinese economy. As China's economy is improving, demand for commodities like iron ore and aluminum and copper will increase. This will impact the bottom line of Vale. In my opinion, Vale is a good investment opportunity for investors. Over the next few months, we will see an increase in the company's stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.