London :Brazilian mining company Vale, posting a succession of record quarterly profits, expects stronger performance in the second half of 2011 as iron ore output is set to increase, demand in China stays strong and prices stay high, CFO Guilherme Cavalcanti said in an interview Friday.
CEO Murilo Ferreira meanwhile told analysts that iron supply will not exceed demand in the next five years.
Vale is currently reviewing the schedules of new mining projects as delays with environmental permitting slows their implementation, Cavalcanti said in an interview from Rio de Janeiro.
"In the second half of the year, prices will be at the same levels, Chinese demand will remain strong, and difficult project execution will mean the market remains tight," Cavalcanti said.
Vale highlights record steel output globally led by China and Chinese iron ore import volumes up on 2010 levels over the first half for its growth expectation. Company chief executive Murilo Ferreira expressed concerns over fiscal issues and the pace of economic growth in the US and Europe in an analyst call Friday, but overall remained positive.
Vale's iron ore pricing formula considered, the average Platts IODEX 62%-Fe ore value of $177.016/dmt CFR North China from March to May in deciding Q3 contract prices.
With one month of spot prices outstanding in determining the average price for the June to August period to help set Vale's Q4 2011 contracts, the average over June to July is around $174/dmt CFR North China.
Cavalcanti said all Vale iron ore fines contract sales are basis Platts IODEX, and negotiations are at an early stage to convert pellet contracts to using similar indices and a Fe-content quality differential and conversion cost factor.
The end of the rainy season in Brazil in Q2 will push up output at its iron ore mines in the remaining six months, he said.
The gains in realized iron ore sales prices in Q2 were resticted by higher moisture content and a slightly lower iron ore grade on average due to heavy rains that extended into May.
The moisture content was 1.5 percentage points higher on average while the Fe-content pared back 0.2 percentage points as rains hampered mining of some areas with higher ferrous content ores to shift the grade mix down, Jose Carlos Martins, executive officer for marketing, sales and strategy told analysts on an earnings call.
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The average Q2 sales price of iron ore was $145.3/mt, 15.1% higher than the previous quarter, while the average pellet price was $206.07/mt, 13.6% above Q1.
Vale is performing strong enough that cash flows allow for a recent $3 billion share buyback and $3 billion extra dividend to be paid with enough left to still meet rising costs, obligations and budgets, Cavalcanti said.
Costs are elevated mostly by the appreciation of the Brazilian currency, he added.
Vale in June announced it cut to 469 million mt from prior guidance of 522 million mt its annual iron ore output target for 2015. It produced 297 million mt in 2010.
Cavalcanti said the paring in estimated iron ore output growth was a result of slower project and expansion permitting rather than weakening in demand growth expected from customers.
China, Japan and Germany are the largest export destinations, while Brazil-based sales to steel mills and pelletizers comprise the second-biggest market after China.
Cavalcanti said Vale's project pipeline is under review, including a 90 million mt Serra Sul (S11D mine) expansion in Carajas still seeking a preliminary license. The $6.7 billion project is targeted on stream starting in the second half of 2014.
Celays are putting pressure on Vale meeting its $24 billion capital expenditure budget for 2011 that, after $6.8 billion capex in the first half of the year, leaves over $17 billion left.
"In the second semester, its normal for expenditure to pick up," Cavalcanti said of the July to December period, adding that Ferreira remains committed to boosting investments later this year to meet the allocation.
Vale on Thursday posted Q2 net profits of $6.45 billion, up 74.1% year on year and the largest ever for the period. A $1.5 billion gain from the sale of aluminum assets pushed up Q1 profit to $6.83 billion. It was largely due to higher sales and robust prices for commodities led by iron ore, nickel and copper.
Sales to Asia as a whole accounted for 52% of the total $15.35 billion revenues, up from 49.6% in Q1 2011.
Iron ore production in the quarter reached 80.3 million mt, the highest ever for a second quarter and 5.8% up on Q2 2010.
Pellet production at 13.1 million mt was up 3.8% year on year.
Vale said the first of two pellet plants in Sohar, Oman, has achieved stability at its nominal production capacity and the second plant is expected to start ramping up in the fourth quarter.
In nickel, Vale successfully ramped up the first line of its Onca Puma project in Brazil's Para state, while the second line is under final assembly, it said.
The group's vessel orders for very large iron ore carriers will remain delivered as planned, Cavalcanti said. Vale's strategy is to lower freight costs and current low freight rates that have prompted others to cancel or adapt orders is irrelevant in its case, he said.