Transformation and Strategies for the long run


China Transformation and Strategies

Vale SA, being a global iron ore & nickel producer, wants to have a bigger responsibility in China's initiatives to cut down carbon emissions by providing higher quality supply of iron ore, according to its CEO Murilo. Murilo Ferreira discussed the company's strategies with a local daily and also shared some of the recent projects as well as cost reduction effort in a volatile market and unstable political environment. He wants politicians to increase effort in increasing prosperity instead of going into arguments. Ferreira is all for the Chinese government's new plan for bringing change to steel mills in the country. Plants that have issues with credit could be consolidated and modernized using modern technologies. Modernization will take some time. According to Ferreira, credit easing had caused iron ore prices to rebound sharply. There is huge credit improvement in China. Loose financing measure gave people access on new housing launches. New properties are being launched and increasing in number. Steel mill efficiency is increasing and much better compared to 2015. China demand for using iron ore has picked up. However, the quality is lacking compared to Brazilian iron ore as there is 67% iron content compared to Chinese iron ore at 25% iron content. It is better for the environment as well.

Consolidation must be done to reduce the overcapacity situation in China. Depletion of iron ore will naturally reduce the overcapacity. Currently about 40 million iron ore tons are being depleted every year. Existing mines must be replaced. Vale has been investing heavily on new mining projects. We had some cost reduction in project budget from $19.5billion to $14billion due to exchange rate fluctuation. Vale intends to stay committed to China and maintaining its position as the largest supplier. Vale hopes to increase the supply from 180 millionto 250 million (tons).The purpose for executing a memorandum together with FMG (Fortescue Metals) is to mix the iron ore materials at China port infrastructure. There is no firm contract now. Vale is in need of good iron ore and is exploring all avenues.
Vale's credit rating was downgraded due to issues in reducing debt. Vale is actually aggressive in cost control. Iron ore cost has been reduced to US$32 from US$90. S&P and Fitch had reaffirmed our investment grade rating but Moody's is deliberating on the bleak long term prospect of iron ore cost of US$35. Vale divested a huge non-core operations amounting to US$12 billion. Another transaction will be announced soon to sooth creditors' concerns. Vale will work hard to prove Moody's views and assumptions. Vale believes that iron ore price will be between US$65 and US$80 in the long run. Brazil's politician should focus and unite on creating wealth to the nation instead of squabbling over petty issues. Economic growth should be the main priority in the current slowdown climate.
Vale has always been the biggest nickel producer globally. There is potential demand for nickel with rise of electric cars, aerospace as well as high-tech industries. Our best nickel product comes from Canada. The future for nickel is bright. Vale is in the top 10 copper supplier list. Vale is preparing to launch production for metallurgical coal located in Mozambique. Railways and port facility are all ready for operation. Vale is the third largest producer for grains and fertilizer. Vale aims to be number one in the near future.
Mining industry has always been a cyclical industry. Central bank monetary policies are very different for China, Japan, EU and US. Vale will navigate the cycles by considering the long term prospect for its projects which take about 8 to 10 years. There is big concern on politics globally and these need to be solved real soon. Brexit issue has been the main political headline and world leaders need to resolve them.


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