COMPANHIA VALE ADS Q4 2009 Earnings Call Transcript

| About: Vale S.A. (VALE)


Q4 2009 Earnings Call

February 11, 2010 09:00 am ET


Fabio Barbosa - CFO

José Carlos Martins - Executive Director of Ferrous Minerals

Eduardo Bartolomeo - Executive Officer for Logistics, Project Management and Sustainability


Felipe Hirai - Bank of America Merrill Lynch

Carlos De Alba - Morgan Stanley

Victoria Santaella - Santander Bank

Ivan Fadel - Credit Suisse

Leonardo Correa - Barclays Capital

Marcos Assumpcao - Itau Securities


Good mornings ladies and gentlemen thank you for standing by and welcome to Vale's conference call to discuss 2009 results. If you do not have a copy of the relevant press release it is available at the company's website at at the investors' link. At this time, all participants are in a listen-only mode, later we'll go conduct a question-and-answer session and instructions to participate will be given at that time. (Operator Instructions).

As a reminder, this conference is being recorded. To access the replay, please dial 5511-4688-6312 access code 45838. The file will also be available at the company's website at, at the Investor section.

This conference call and the slide presentation are being transmitted via internet as well. You can access the webcast by logging on to the company's website, investors section or at

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments, as a result of macroeconomic conditions, market risks and other factors.

With us today are Mr. Fabio Barbosa, Chief Financial Officer; Mr. José Carlos Martins Executive Officer for Ferrous Minerals; Mr. Eduardo Bartolomeo, Executive Office for Logistics, Project Management and Sustainability.

First, Mr. Barbosa will proceed to the presentation and after that we will open for questions and answers. It is now my pleasure to turn the call over to Mr. Barbosa. Please sir, you may now begin.

Fabio Barbosa

Thank you, good afternoon ladies and gentlemen. Thank you very much for attending this conference call in which we are going to discuss our 2009 results and the perspectives for 2010. Of course the outset, we should have in mind that 2009 was especially in defense that we would say something that we hadn’t observed for lets say several decades. It was a very unique situation that caused unique approach and I would say a unique set of results considering the previous trends that we observed in house factor and in our company.

So, was a very challenging year, but we believe that considering the environment that we faced and the major of our exposure to this global recession as valued out of the major producers, minerals and other producers was the most exposed in our global fashion, we believe that we performed in a very reasonable way, and in 2009 our EBITDA sale to $9.2 billion roughly and our net earnings as well shows a reduction from $13 billion to $5.3 billion, and despite what the number shows, its important to stress that we implemented a lot of measures to cope with the recession that prevail in 2009. And one of the few episodes of global recession that last 100 years, and so we have to adopt various types of measures in order to reach a limit structure and to be more efficient in the long term. Some results are there but I would say that a lot of results you'll see over time as we move back to full capacity utilization as expected this year.

So, we restructure our corporate activities and was a sharp reduction in the [cause of the copper] center and about 10% in 2009 compared to 2008. We set about $40 million, the restructuring of the nickel business, its something that we managed to achieve this year with across the board cost reduction of 25%. At the same time, we improved processes in our shared [sale] centers with the implementation of our global presence in this function. We are fostering innovation in the last quarter, we are feeling pleased to present the deals and the result was about 7000 and ideas to improve operations in our company. So, it's a lot of material to work with and we hope to deliver some results associated with that.

And also we are working hard as the above producer, above product producer. We are trying to optimize our logistics efficiency and we have very nice results to show as the NKBS shows there with the increase an average of 22.5% in the last five years ended 2009. So, it’s a lot of social method that are being adopted with aim of getting to a much better, much more efficient cost structure in the long term. Of course you’ll observe the results in the fourth quarter and one cannot deny that we had some issues related to cost. Some of them were related to the depreciation of the exchange rates as you may appreciate, and others are related to the recovery of our production to move more, more levels.

On the one-off items, I would mention and the tax contingency that we cope in the fourth quarter, that represented the savings of our company the long term of about $100 million but we have to invest $110 million in dealing with this contingency, as we adhere to a special amnesty program here. So we also promote a write-offs related to assets like Valesul $85 million, Barcarena thermal $70 million and Copper Cliff Deep a project in Canada that we also associated at $35 million charge to these project. And finally we had labor agreements in the end of 2009 that represented a one-off payment of $35 million to our employees on the top of the 7% nominal increase that we observed in both in November and December and also the per team salary that we pay here in Brazil.

So it is a set of elements that helped to explain the increase in cost that we observed in the fourth quarters, some of one-off major, some related to the exchange rate depreciation, but of course we have to work hard on that, and we are not happy with the result although we made a lot of progress, part of the cost are associated with as I said the resumption of normal levels of production and we believe that we will be able to deliver their actual reserves as we move on during the year of 2010.

Turning to the sales, I will like to highlight the remarkable achievement of increasing our iron ore phase to China to 140 million tons a record in our book an example for our ability to cope with a very diverse scenario that we faced in beginning of 2009. If you recall we were full exposed to a market that has reversed completely from the usual way of operating to instead of the FOB market we faced with a market that were mostly operating on a summate basis and we are almost fully exposed to freight rates and very volatile environment and we managed through a very dramatic and objective marketing policy and manage to reach a new record in sales to do very important [country] in our sector.

Well, as we announced, we continue to believe that there is a very positive perspective for the sector, minerals and metals and we particularly invalid where we have the best pipeline of projects in the industry. So, in this connection we are investing $12.7 billion this year, compared to $10 billion last year and $11 billion in 2007. So, it’s a $12.9 billion and in 2009, we also invested $12.7 billion if we put together the acquisition.

So, in total we are talking about in four years time something around $50 billion in investments, showing our commitment and our policy view about the long term performance of the industry. So, it’s a very important commitment that we have and it should continue. We have seven new projects coming on stream in 2010 iron ore we have Carajás Additional 10 but this is the only project that you'll see in the ground before 2012. And we have the [vitalizing] plant of Oman to use our Pellets and in Nickel Onça Puma the first line will start in mid of the year. Tres Valles project in Chile with 18,000 tons of copper buy over 3.9 million tons of Phosphate rock that will start at the mid of the year.

And the power plants of Estreito and few plants of CSA in each we have our share of 26.87% as invested more money last year. So, it's again a demonstration of our confidence in the performance of this sector. As for Goro I would like to inform that we had our successful first half in the ramp up, our first campaign of HPAL produced 18 metric tons of nickel in MHP it’s a good start, the autoclave was little impact was there was no issue it very smooth campaign and now we are cooling the equipment in order to allow for the start of a new campaign, a three week campaign in the process of ramp up. This is a long process, but so far is going extremely well in our view.

Coming to, our perspective about the markets. We see the global demand as we put that in the cycle, gaining momentum. The global manufacturing output is in a clear recovery path. Of course with the impressive lead of the emerging market economies but also with some contribution of the developed world, particularly the US and Australia, Japan and Europe at a slower pace, so we see clearly a recovery on the ground and this is very good news for us as a global industrial production the main driver of demand for our materials. The global PMI regions their highest levels since June '06 as its put there and the ratio of new audits to inventory is inventory also is showing a positive indication about the future, so we are enhancing our perspectives of future sales in a world wide basis.

The global carbon steel output is going steady although with some discrepancies between what used to be in 2008 and what we have now it's slightly below the peak level in July 7, '08 but is very close, we are talking about 1.2 billion tons of steel being produced in the world. So it’s a very different position from the one that we have in January '09 when we are running at the 900 million tons production rate annually. So, and this is a global recovery and with more speed in some countries like China and let us see in August but the fact is that the demand for raw materials increased sharply, particularly in the second half of the year. And at the same time what we see its potential lower contribution of important supply to the fee bond which is India and we showed there that there is a steady decline in their share, in the India in Chinese imports of iron ore and this is showing what we have been flagging for sometime now that India and most like we’ll have to address there own demand internally in the long term considering the population and the demand potential for a few products in that country.

So, what we see today it’s a global market that is clearly showing excess of demand and a clear supply constraint. We had operational issues in the fourth quarter that we were a little bit short of what we plan to sell to the market and we were not able to show this to (inaudible) those operational issues but clearly what is presenting us from steady per day all issues, because their market is very, very strongly demanding more material than we are able to share, and there is clearly shown by the spot process that you can see in chart fixed in. So it’s a very strong market because (inaudible) in our view (inaudible) supply constraint. The global stainless steel production decline in 2009 again for the third year in a row, the last time it happen at similar trend was in that two year period and in 2003 and in 1993 so in our view there is limited room for further decline, actually as we see the recovery in the developed world, I'll go at a slower place. We should see some additional momentum to the to the demand of this material that combined with the demand from emerging market economies should provide quite stronger market for nickel in the medium to long term.

At the same time, we are resuming production at Sudbury and we are operating the mines of Coleman, Garson and Creighton. Clarabelle mill our early back operation Copper Cliff is now they are operating, the first shipment of feed to Clydach that happened this month. So we are positive about the perspectives of resuming standard normal levels of operations in our Canadian operations sooner rather than later.

Finally, a word on our newest investment just after the night we announced the conclusion of the negotiations with Mosaic and with that Vale is now is going to be rendered deal is surely closed is going to be the owner of Fosfertil share and also Bunge upstream fertilizer assets. So, this is a major investments considering what we have in our pipeline and what we are paying for the asset but the ratio now for as allocating money to this business is virtually the same that we have to invest in other minerals and assets.

The drivers are very similar, and in our case in our perception is that the rapid the current income growth of emerging market economies will have a very important effect on the demand for both the (inaudible). So we believe that it should be as we observe the matters in general our structure shift in demand and for these materials and again in our perception there is a limited supply of those.

There is also the impact of the increasing share of bio fuels as a source of energy considering the concerns about climate change. So this should foster further the demand for this material. Emerging markets, emerging Asia and Brazil as we put are the main sources of demand for export [line] so the strategic position that wee are taking in Brazil is very important because together with our logistics this should allow us to bear more synergies and to be more efficient and combine also with our other projects that we have in the Americas and other continents. We should be able to become one of the top players in this segment.

Brazil is a very solid platform for growth in this business as we put there, today it has share in the total consumption of this phosphate and potash, 9% and 16% respectively, this should grow in 10 years to 13.5% to 18% respectively again, so it is a very promising market by itself. And we have a very good position when we combine this whole step of project that we are developing or we are about to implement particularly after this transaction, as you can see page 23 we have the Regina project in Canada other concessions in Canada that combine should allow us to reach a production of 5.2 million tons we have Taquari‐Vassouras that of potash Taquari‐Vassouras is under production right now but we are there we have Carnalita with a potential production of 1.2 billion tons of Potash, Neuquén an old project that we had in our pipeline 1 million tons of potash as well.

Rio Colorado the project that we brought from (inaudible) together we had to design a project 4.35 million tons of potential production and fully dramatic. And in phosphate, we have Bayóvar II stage that should allow us to reach about 6 million tons of phosphate rock, plus Evate project in Mozambique, that is full feasible we maybe able to produce up to 2 million tons of phosphate rock as well. Its a very broad based pipeline of project that should allow us to compete in a very efficient way in this market.

So, the acquisition of Bunge and Fosfertil its very much in line with the strategy. So, it's the combined assets have Proven and probable reserves of 1.5 billion metric tons of phosphate rock and phosphate and then production capacity of 5 million tons of phosphate rock and with the project Salitre that we are able to produce about 2 million tons per year when full implemented. Though it's not fully developed, because the differences of point of view between shareholders in phosphate deal. So now, as we control the company we should be able to implement this project smoothly.

And the end of the day, we are acquiring a market share of 36% of Brazilian consumption of phosphate nutrients. So, it's a very interesting transaction and should allow us to position Vale as one of the top players in the fertilizer business worldwide. So, we are investing potassium phosphate or leveraging an all over strong mining competitiveness, so we are actually this is mining business in our view and we'll operate into upstream and we have no interest to go to the nitrogen set of products our focus will on phosphate rock and potash as we put there in chart 25. So, Vale has a very strong track record in operation of fertilizers with Taquari‐Vassouras something that operation that we have for 18 years now. It’s a very successful operation and also thereby other project that is we are implementing in Peru is one of the most cost efficient projects we have in the industry.

So, we are not newcomers to this business and we understand mining business. So, we believe that we are increasing Vale's exposure to this very good momentum is sponsored by the growth of the emerging market economy. And finally, our view about the future where we are going to be in seven to eight years time the idea is that we'll have and the production of phosphate has phosphoric acid. 3.3 million tons per year and total production of potash of 10.7 million tons per year. That should allow us to be one of the top players in this segment by that time.

Those are my initial comments, we would like to have your views and the comments in the Q&A session. Thank you very much.

Question-and-Answer Session


Ladies and gentlemen, we will now begin question and answer session. (Operator Instructions). Our first question comes from Mr. Felipe Hirai from Bank of America Merrill Lynch.

Felipe Hirai - Bank of America Merrill Lynch

I have two question the first one is if you could give us an update on the price negotiation and your strategy in the market going forward. One of your competitors suggested yesterday that is starting point of the negotiation should be the spot price at a 90% premature benchmark? And also given the spot premium I would like to know how do you expect anticipate your sales in the benchmark and the spot market in 2010? And my second question Fabio would be on your cost side could you help us understand what happened to your cost in the fourth quarter because they were way above what we were expecting, is there any say on the cost that was non-recurrent that we should expect the cost should come down to first quarter. Thank you.

Fabio Barbosa

I'll ask Martins, to answer the first question and then I'll come back to your last question.

José Carlos Martins

Good morning Felipe, good morning and good afternoon everybody. Last year was a year of big challenge for iron ore business. The very nature of the crisis affects the literally the western worlds put Vale I don’t know business is in a very difficult position because our main customers stopped buying, so we meet up the few the very fact that we couldn’t keep producing and shipping is because customers didn’t send the vessels, and the market that was buying which was China they stopped buying because the customers decided to buy differently instead of fulfilling their contract obligations.

So, the very nature of our business which was supported by long term contracts, FOB sales and benchmark pricing or supervise, so we have to respond very quickly to that and at least that we start shipping or without the customers outside the contracts to sail in China on a spot basis. So, we already started working in such spot business scenario. So, I think we are looking long term contracts differently now, we are completely free to work on com CNF, [CFI] basis not only FOB but [CFI] basis, if customers don't send their vessels, we send ours.

And so this means that we are preparing to work whatever the market side is better, benchmark system or spot basis we have in all, we said that before, we have enough documents, so we are prepared to sell this mark or spot basis, whatever we will be needed. Nowadays it’s clear that spot now is twice the price of benchmark. We are fulfilling our contract obligations for a while, but we really expect that our customers understand that this big difference cannot be kept.

All benchmark is able to accommodate the spot market preparation, we are not talking about there is more market, nowadays spot means almost 50% of the total (inaudible) market. And in China it's probably near 7% of the total Chinese iron ore market. So, spot prices a realities of price that it has to be looked it as a market price today. So, the situation is such that our customers will have to accept a different price system that it takes into consideration what is going on in this huge spot market today. Or if it's not possible to reach an agreement based on our fixed price for an year that takes into consideration this changes and despite the outcome probably we believe be that spot the price that we will be affirmed as far as iron ore market is concerned.

So that’s the scenario that we see today. And Vale is now much better prepared to work in any different scenario that could arise from this situations. So, we made our homework, we have now a big fleet of vessels, we can sell (inaudible) we can see spot, we can even can sell freight if it was needed. So, we have a very, very comfortable situation as far as price system as far as the way the customers will buy from now on. We hope that customers will be willing to understand what's going on its completely different situation from the past where you have a very stable market and practically no spot market there, so as time went by spot market was growing and I think today spot prices the market price that's our view so far.

Fabio Barbosa

Well as for your second question Felipe I believe that you mean the cost of good sold right, and so what we had first the appreciation of the [area] and this was very important event it explains some an $186 million of the total increase of the $400 million in this item. We have of course what you mentioned the labor agreement that represented 1 off cost of $35 million but it has a permanent increase of 7% in rise from November onwards for this item. We hired 1000 new employees this last quarter we have with this agreement an increase in the provision for profit sharing as removed the salary base. We have some important works in maintenance in order to resume operations and it is an important part it is scattered across the accounts but you see the real material spare part maintenance cost outsource services, you see a lot of work done to put back in operation the operations that were previously idle so part of those are recurrent, part of the expenses are permanent.

You also have the acquisition of the increase in energy costs that represented some 50% of the total increasing COGS in the fourth quarter of ’09. We had also to increase the acquisition of broader some third parties. So we brought ballets from our (inaudible) operation which is not consolidated under the U.S. GAAP so we put it back in operation as a result of the stronger market and this represented part of the cost and we doubled, not we tripled the acquisition of (inaudible) from 240,000 to 740,000 tons and iron ore from third parties in order to cope with top clients and the very strong demand and a very strong market that we have rebuild those acquisitions from 600,000 to 1.2 million tons of iron ore in the same quarter. So, nickel the same, nickel as we have part of our operations stopped we [housing] build the acquisition of products by almost 60 million.

We have some expenses related to Vale (inaudible) that once we conclude that the transaction, they will no longer be there. But we bought aluminum from third parties with $22 million in the fourth quarter of ’09. Another element that’s I'll like to ask the invited Eduardo Bartolomeo to comment on that, Eduardo are you online? Eduardo

Eduardo Bartolomeo


Fabio Barbosa

It would be the mortgage cost and the operation at the ports, we had a lot of some operational issues that are like to invite Eduardo to comment. But at the end of the day there is a minuish cost increased by $18 million in the fourth quarter associated of course with very strong market and to get with the resumption of operations particularly logistics and the strength of the market. Eduardo could you comment on that on the (inaudible) issue that we have in the port?

Eduardo Bartolomeo

Yes, of course. Good afternoon everybody. I think first of all, as much instead said we had a very, very strong and very difficult year. We started like with various phase in the year and we ended in another side. Just to have an idea we increased 40% of our production. So, it’s a shift from stop and go very, very, very fast. So, we did a amazing job to get back on track and of course there are some back falls on that. So, what Fabio is mentioning about certificated (inaudible) is something specific about Tubarão port around the issue that we had to change our ship loaders into the fourth quarter. When you look quarter-to-quarter basis we lost 2.5 million tones on Tubarão due to the shift to the change of the ship loaders.

Third (inaudible) is non-recurrent but these are excellent view because we have now finished the project so we gave to Tubarão port and its already the most efficient quarter we have to operate even in the world but its actually our brand new port with a five dumpers the two ship loaders so its as we are operating really well on the logistic side and is ramping up this year as the fifth line of local tourist coming on track one of the labors of the project is here on the iron ore side of the mines. It was going to predict very well. So we have very good expectation about the Tubarão port.

But we could have offset that on a (inaudible) port, they are our main port now, it's in the Southern east port. And we have as Fabio mentioned before the issues on dumpers because we had the implementation of the fourth dumper on November that should increase a little bit of our capacity but due to the ramping up of the our maintenance problems very, very specific problems that we had there. We were unable to offset the losses the losses we have made in Tubarão that were planned because we had already planned the project, so basically are those issues when we look forward I think we are getting better shape of course historically we have the rainy season, we had a very strong rainy occurrence in Tubarão on the November, this month in Carajás was the biggest rainfall that we ever had there, but any how we [bought] it very well on the mine side we stick to our budgets, we were able to stick to our budget on the shipping side but of course historically is different peers of dry season and rainy season, but I think we are in a very good shape for 2010.

Fabio that's all I have to comment.


Our next question comes from Mr. Carlos De Alba from Morgan Stanley.

Carlos De Alba - Morgan Stanley

The first one is are you trying to restart the production in February to increase the volumes, which are a reference of how much volume do you expect to be able to achieve with this strategy that you have put in place that'll be my first question and my second question is if Martins could comment on the expectation of the Chinese Steel production this year and how much the that market may be imported of iron ore from the global producers? Thank you.

Fabio Barbosa

Carlos thank you for your question and as for February we want to resume normal operation as soon as possible and we are working for that and that is our deal of course there are issues that we are working but we have very good start and there is not and the mines so the idea is to progressively reach the normal production levels and as I said sooner rather than later. Martins do you want to comment to the second?

José Carlos Martins

Yes, as far as (Simer) is concerned the last year their imports grew 40% to a 627 million tons of iron ore. 12 months finishing this January add more to 640 million tons import. Every information we have from China, the indication is that is steel production will continues to grow not in the same phase as last year, but there will be a small growth this year. So, I think that iron ore imports from China, we'll be at least 650 million tons this year probably going a little bit above that level.

We have a situation through (inaudible) because its spot pricing in China grew lot now today its around $130 per ton, so what you’ll be back of this prices domestic production, so this information is not clear for us because besides the high cost of local miners we have some environmental constraints and also the very effect that Australian importing so much ore this year many mainly steel mills in China that were used to using use t he local ore and now are more resilient to buy a local ore again and they are keeping there one of the based on important ore. So, but we don’t see big changes from last year and if some centers happen it will be for the upside we think.


Excuse me our next question comes from Ms. Victoria Santaella.

Victoria Santaella - Santander Bank

I'm sorry, Fabio, to insist a little bit, but I would like to understand, if the supply/demand situation in iron ore is still strong right now and still tight. What is going to be your marketing strategy? Are you going to give more preference or push towards spot prices or continue more on the line of referral prices as we have seen in the past contract prices?

And I guess this comes from the situation where we are seeing other competitors moving or trying to maximize average prices and average revenues. That's my first question, and the second one is if you can comment a little bit in terms of how is the evolution of your transportation fleet? How are your costs if there is anything to be mentioned there?

José Carlos Martins

Well, as far as the price system Vale always keep this policy of standing on benchmark basis, but we believe you cannot keep such a huge difference between spot and benchmark. So, our view is if our customers want to keep the benchmark they have to accept something, first closer to the level of spot today and secondly some changes that keep some kind of flexibility on the pricing system, because we cannot live with difference like that.

This difference raises a lot of arbitrage in the system; everybody is trying to buy on a benchmark basis to sell on a spot basis, so it is really a mass to manage that situation with such a big difference between spot and benchmark. Another issue is that today spot is a bigger market than benchmark. More I don’t know is being slowed today on spot basis and in benchmark base.

So we speak with the benchmark system, but on the other hand we needed to have some kinds of flexibility to accommodate the situation created by this huge and very dynamic spot market only to give you an idea since the prices started up to June last year, spot price was below benchmark and attracted a lot of customers to buy in this market. Since in June the price moved to the same level, to the benchmark and has stayed there for three months at least and from October on last year it started moving, a spot above benchmark. So this changes very dynamic changes, indicate us that if you want to keep it benchmark we needed to define our system that could have some kind of flexibility to cope with the valuations. It's impossible to keep business as usual with this, so here is a difference between a spot and benchmark, that’s our strategy; I think I'm clear about it..

Fabio Barbosa

Eduardo would you like to comment on the fleet?

Eduardo Bartolomeo

Yes, last year I think there was a big window that was open to us about evolving the strategy to fulfill the needs of the INR business about the fleet. I think we went on then fixed very comfortable level of freights for 2010. We acquired 17 load ships added to our 30 ships we had already in our fleet. We are building around 20 and we have long-term contract for the future or so. So I think we are in a very comfortable position.

There is no evolution of the cost because we think about the cost for 2010 and forward. Of course 2011 is going to come owned over the long-term contracts for the big vessels but for 2010 it was already fixed during 2009 and as I said in a window that was very good in a sense to guarantee a reposition cost for the ships. I think that’s basically the…

José Carlos Martins

I would like to add something the answer Eduardo, that our shipping strategy has two basic points. First is to ship any strong reproduce, even if we don’t have customers we are going to ship it.

Second is to keep the freight differential between Australia, Brazil to Asia as low as possible. So, based on these two objectives, where our fleets will have to decide which will have it to be to reach this target.


Thank you very much gentlemen. Excuse me, our next question comes from Mr. Ivan Fadel from Credit Suisse.

Ivan Fadel - Credit Suisse

Thank you everyone for the explanations so far. I would just like some details about the subjects that were already discussed.

Number one, I understood from Martins and Fabio that the spot market for iron ore is even larger than the contract prices in China. My question would be, then what were the reasons behind Vale selling less on the C&F basis in the [first] quarter 6.8 million compared to the third quarter. I understand it could be shipping issues or maybe more volumes were diverted to traditional markets, but I'll just like to know the reasons behind this or if we could see that number improving going forward. And, also, my next question would be if you could quantify as of today how much Vale could sell if you use the whole capacity that you have for shipping, how much Vale could sell on a C&F basis in terms of volumes in a given year. Thank you.

José Carlos Martins

I think I am sorry to say that the size of our fleet is confidential information okay. We don’t release this kind of information, but what I can tell you is during this crisis, we have to stop producing because we did not have ships for our vessels, for our own. Customers didn’t send the vessels and so we have to stop operations because we cannot keep producing we have no space. The best place to start, I don’t know or any mining product is in the mine, is in the pit. So to take from the pit and to put somewhere is not a good solution. So we understood by that, that we have to move from FOB to CNS according to the market situation.

If the customers send the vessels we sell FOB. If they don’t send with our CNS, so we needed to have a flexibility towards CNS and further according to the market situation, and as I told you before, we have three legs in these markets, it is long-term contracts FOB and benchmark prices and these three things works together.

So if customers didn’t fulfill their obligation in their LTC, it's clear that they are not sending the vessels and also they are looking for a different price in the market. So the situation we have today is not we are going to move from FOB to CNS, no. The situation we have today is we are going to sell every ton that we produce and we will do it FOB or CNS according to the markets; according to our customers. So, and that's the big difference. We have to stop production next year because we cannot shift. Now we are in a condition to shift even if you have a problems with customers. So I wouldn’t put our strategy as moving from FOB or to CNS.

Its not our policy to make money in freight, our policy is to make money in iron ore. So the shift is needed as a way to give us this flexibility. What we are looking for is full flexibility in price, in shipping, FOB or CNS and also long-term contract or completely spot is what is needed. As we told before, we don’t have a document and I think of the crisis or as pictures that we have it to be more flexible in our policy and that we needed to have all of these windows open to use it according to the market moment.

For instance, nowadays every customers are standing restless because they want to get the ore at the benchmark price. So is a completely different situation. So, and Vale now is better profiled. If you needed to ship mark CNS because customers are not buying, we are in condition to it, and what makes it possible is the spot market in China. Nowadays you have near 600 million tons of ore being sold every year in the spot market in China. So this is an opportunity for everybody that wants to ship its ore. So, our main target is not have to constrain our production because we don’t have a sheet, so that’s the main base of our policy from now on.


Excuse me, our next question comes from Mr. Leonardo Correa from Barclays Capital.

Leonardo Correa - Barclays Capital

My first question is regarding the annual volumes outlook and the challenges you are encountering as you shift to full capacity. We've seen in the fourth quarter that you have some maintenance stoppages at Carajás and also at Ponta da Madeira terminal which Eduardo has just commented on. Can you please comment on if these issues have been concluded or should we expect some negative impacts going forward in the upcoming quarters? That's the first question, please.

Eduardo Bartolomeo

Okay, on the size of the logistics, as I said before we have separating two labs. First of all is really (inaudible) they are perfectly capable for shipping whatever plan we have next year either on MRF, that’s not fully operated by us or nor at Ponta da Madeira and Carajás. So we had even the fleet for the upgrades that’s probably issue. Along the ports as we mentioned before, we have good news of around Tubarão that we finished the overhaul of Tubarão. Its an incredible project that enhanced capacity vessel. So we are able to see the increase of production that’s going to be happening as Martins said in the beginning around the mines and he can comment a little bit later. We have issues around the Ponta da Madeira. The dumper as I said, the fourth dumper was implemented in November; it's ramping, is operating very well so far. This month is growing very fine, and I think we are overcoming the problems. Naturally as we do the right thing, that is do the right manners at the right time, and I don’t believe that it will be a big issue on the quarters to come. Anyway anyhow so far we are facing a tough time for mining. It's the rainy season for everybody, for the railway, for the boats and for the mines but its not an issue to start to fulfill our guideline to produce that from the point of view of logistics. If Martin can add something to this.

José Carlos Martins

Yes in the mine side, our capacity is around $25 million tons per month and during the rainy season this volume down to $22, $23 and in the dry season goes up to $27, $28, but on average is around the $25 million tons. Mining, railway portal all of the system is designed for such a level and with some spare capacity in the logistics side. So we believe that we can reach this level. To ramping up from the level we reach during the crisis was a big task for two reasons. First, we cut capacity a lot during the crisis, at least to 40% in the mining side and 80% in the pelletizing plant. So that was the size of the capacity cut during the crisis. So and because we are preparing to face a long period, it tries on the last (inaudible) you type [wwvv] all of this, it seems that the crisis was with that, so in the start to recover fast and we have a lot of trouble to get back to the same level and we have some space yet to conclude there to improve in order to get our full capacity. So, but you can look at average of 25 million tons per month as our average capacity for this year and we expect to operate to reach this level as soon as this rainy season finish, we expect to working this level of production from now on. Market is very strong and demand is very strong. Europe is recovering faster than we expect also. Japan is now in the same pre-crisis level and China is well above the pre-crisis level. So, the situation for the market is even better than it was before decline. So, very difficulty for us is to cope with this production recover one sight and other to implement that the new project that we have being developing and during this period. So I think again, situation move it to the production site and we need you to work, to improve our operations and to smooth the link between mining railway and port, but we are much better prepared. As Eduardo stated, we completely revamped Tubarão port. It's quite a brand-new port with five car dumpers to big ship loaders, same situation also in Ponta da Madeira. So we much better prepared now to ramp up our production and to reach a stable level according to our mining capacity.


Excuse me our last question comes from Mr. Marcos Assumpcao from Itau Securities.

Marcos Assumpcao - Itau Securities

My first question is on the iron ore market. If Martins could answer what were the main reasons that pushed the spot prices up from $100 per ton in November to $130 per ton currently and, also, if he could mention some signs of the market tightness. We have been hearing that, if he could confirm, we have been hearing that come clients are willing to pay provisional price in order to guarantee the volumes right now in the beginning of the year.

José Carlos Martins

As far as the strong market mainly in China I think many factors are working on it. First is in China, you have today a very strong winter, and so this creates some problems for local ore production and also for logistics to move iron ore from ports to the mills. So, this is an internal factor.

Besides that we have two additional factors, one is that local steel production continues to grow and third is many few mills that never used imported ore after this crisis, they had access to this ore and now their preference is for imported ore. I think the space for local ore is narrowing, and you can see when you compare a spot price for imported ore against export price for local ore you already can see a difference. The customers are paying more for imported ore than local ore, so this means that there is a structural change in the blast furnace building in China mill. So more and more, the imported ore will take share from the local ore.

As far as provision of price yes, we are discussing with many customers provision of prices. For instance in pellets that we have a very low price established last year to cope with the very low demands and now the situation is completely different so we are now defining provision of price with pellet customers and also in case of China, 75% of our contracts in China are based on calendar year. So it means that 75% of our sales in China is now based on the new price and we already negotiated with these customers a provision of price for this period. So and I think that this huge difference from this part and to the benchmark creates a good condition for establishing a provision of price when the contract is based on calendar year.


Ladies and gentlemen this concludes today’s question-and-answer session. Mr. Barbosa, at this time you may proceed with your closing statements.

Fabio Barbosa

I would like to first thank my colleagues Martins and Bartolomeo for participating in this conference call and also to say that we are at disposable for further questions that you may have about our results and perspectives. Thank you very much for attending this conference call.


That does conclude our Vale’s 2009 results conference call for today. Thank you very much for your participation and have a good day.

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